Energy ETFs and Hurricanes

With Hurricane Gustav now packing 90 mph winds and apparently headed in the direction of the Gulf of Mexico, this seems like a good time to pull up some data from the Hurricane Katrina period to get a sense of what happened to energy stocks during this time.

Recall that of Katrina was the fourth strongest Atlantic hurricane ever recorded and the most intense hurricane ever to enter the Gulf of Mexico at the time it made landfall on August 29, 2005. Amazingly, just three weeks later, Hurricane Rita turned out to be even stronger than Katrina, reaching maximum sustained winds of 180 mph on September 21, before losing strength and making landfall on September 24 with 115 mph winds. While Katrina ended up doing most of the damage, the appearance of an even stronger Rita headed toward an already damaged energy infrastructure almost certainly had a much stronger psychological impact on the markets. Katrina, which strengthened considerably just before making landfall, arrived with much less fanfare than Rita.

In the chart below, I have captured the relative performance of crude oil, natural gas, the broad energy select sector SPDR ETF (XLE), and the oil services HOLDRs ETF (OIH) for a period of a little over six months leading up to and following Katrina and Rita. Note that there was very little net change in crude oil, XLE and OIH from the end of July to October/November; almost all of the action was in natural gas.

Comments

[bertil:]

That's quite a surprise! Why the huge increase in gas? Do you think the same would happen again IF we had similar storms [as might be building with Gustav and others]?

2008 Aug 26 07:25 PM

[Alan von Al...:]

No surprise. The Gulf is a gas producing region, connected by pipeline. Shut down wells, pull people off platforms, and the gas stops flowing.

2008 Aug 27 04:27 AM

[Bobwins:]

Ngas is also not easily replaceable from other sources. If the GOM platforms are shut down because of hurricane risk, there are short term reductions in productions. But if there is permanent damage to the platforms or especially undersea pipelines, the repairs could take months or years. The ngas is not as easily replaced as the oil.

Of course, a spike in ngas prices to double digits might attract more LNG but that could take months to arrange also and the price would have to be much higher than the current 8.62 to compete with China, Japan, S. Korea and Europe who are paying up to twice that for LNG.

2008 Aug 27 10:53 AM