Investment Contrarians

Will Hurricane Sandy Affect Oil Prices?

By for Investment Contrarians |

The arrival of Hurricane Sandy on America’s shores is causing severe disruptions to the normal course of business. All along Hurricane Sandy’s path, businesses are shutting down and preparing for the worst. Today, ahead of Hurricane Sandy’s arrival, the U.S. stock exchanges and floor trading on the New York Mercantile Exchange (NYMEX) are closed, although electronic trading on the NYMEX will remain open.

Hurricane Sandy will have one of its biggest impacts on gasoline prices, but won’t necessarily have an impact on oil prices. Many people misunderstand the correlation between oil prices and gasoline prices. For gasoline to be produced, refineries need to convert oil into a usable product. Because of the arrival of Hurricane Sandy, a vast number of East Coast refineries have been shut down.

In fact, over two-thirds of the refineries on the East Coast have been shut down due to Hurricane Sandy. (Source: “Two-thirds of E. Coast refiners shutting as Hurricane Sandy nears,” Reuters, October 29, 2012.) The lack of refining capacities will keep gasoline prices high in the affected regions. Oil prices, however, have been, and will remain, weak due to macroeconomic pressures. In fact, if refining capacities remain off-line for an extended period of time due to damage from the storm, we might see a decline in oil prices. This is because firms are continuing to pump oil; but with refiners shutting down due to Hurricane Sandy, the oil is not being used to convert to gasoline. This will lead to the additional build-up and storage of oil, and a decrease in oil prices if all else remains equal.

Hurricane Sandy will remain a threat for some time. Until the full damage from Hurricane Sandy is known, many gasoline traders and citizens who rely on these East Coast refineries for gasoline for their vehicles will certainly be affected.

Once Hurricane Sandy passes, we will again focus on the economic and geopolitical pressures building on oil prices. The economics, as I have written about previously, indicate that oil prices should continue declining. However, the tension in the Middle East is always at the back of traders and investors’ minds, as any escalation of violence will send oil prices spiking higher.

Hurricane Sandy’s effect on refineries being shut down will have an impact at the pump, but not on oil prices. People have to understand that these are two separate markets. For car use, gasoline must be converted from oil. While oil prices are an input into gasoline prices, with the refineries being shut down leading to a lack of gas supply, this will mean supporting higher gasoline prices until Hurricane Sandy has ended.

For now, the approach of Hurricane Sandy will mean stocking up on short-term supplies, such as gasoline. But I would avoid speculative bets on oil prices based solely on Hurricane Sandy. Oil prices are far more complex than the impact of Hurricane Sandy, as geopolitical and economic variables come into the picture.

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