Are natural disasters good news for trading commodity stocks?

Hurricane Harvey caused petrol prices to rise in Texas and throughout the United States. Does this mean that natural disasters such as hurricanes are good news for the share price of commodity companies?

As well as the devastation caused to the city of Houston by the high winds and a year’s worth of rain falling in a few days, there was also a major impact on the Gulf of Mexico’s oil and gas infrastructure.

The Gulf is one of the most important areas in the US for energy resources and infrastructure. It accounts for 17% of the country’s crude oil production and more than 45% of the US’s petroleum refining capacity is there.

Aftermath of Hurricane Harvey in Houston: PA Images

Pump up the volume?

The petrol price rising may suggest that oil company profits are also doing well but unfortunately it is not that simple. In fact, crude oil prices fell after the hurricane.

Although there was less petrol available, the damage caused to Houston, the US’s fourth biggest city, meant that demand fell significantly.

There was also less demand from the refineries meaning that the loss of demand was greater than the loss of supply.

So companies specialising in oil production did not see their share price rise. To add to this, before the hurricane there was a large oversupply of crude oil and high levels of storage so there was never likely to be a shortage.

Less refined

The offshore oil rigs in the Gulf of Mexico were spared the brunt of the hurricane. But modern rigs tend to fare pretty well in hurricanes these days and can shut down production and wait for the wind and rain to abate.

Land-based refineries are not so hurricane proof and Harvey’s path made for them rather than the rigs. The US’s largest oil refinery, Motiva’s at Port Arthur, was among those forced to close. Overall refining capacity in the country fell by about 16%.

But refinery companies benefitted from the fall in capacity. Valero, the largest refinery company in the US shut down its Texas operations. Three days into the storm its shares were up by 4%.

Three other refiners, Valero, Phillips 66 and Marathon Petroleum, gained $850m in value despite their Texas refineries being closed.

Refiners make their money from the difference in the price of crude oil, which was falling, and the price of petrol at the pump, which was rising.

These gains are likely to be short-term though as refinery capacity will start to pick up and the price of petrol will come down, lowering the margin.

Hurricane Katrina

Harvey’s impact is different from that of Hurricane Katrina which hit the Gulf of Mexico in 2005. Then, more than 90% of oil production and more than 80% of gas production shut down.

Since then there has been a boom in shale oil and gas production in the US. Production in the Gulf of Mexico has steadily fallen in importance with fields in states such as Pennsylvania and West Virginia coming to the fore. 

This shift away from the hurricane-prone waters of the gulf means that there was little effect on wholesale gas prices, which are currently less than a third of the peak they reached when Katrina devastated the gulf.

Shared out

The likely impact of a natural disaster in the US on oil and gas company shares has decreased since a lot of production was moved away from the hurricane-prone south.

Crude oil prices will also depend on worldwide production and storage levels rather than just the weather in the Gulf of Mexico.

Land-based refining facilities are still more vulnerable than the offshore production rigs but decreases in refining capacity are often offset by decreases in demand from the areas hit by the hurricane.

Stocks that generally do well around the time of a hurricane are ones associated with home improvements such as Home Depot and Lowe’s. Flooring company Lumber Liquidators saw its share price rise, as did generator manufacturer Generac.

Insurance and reinsurance company shares tend to fall after natural disasters as the financial impact hits. The losses for insurance companies from Hurricane Harvey have been estimated at between $10bn and $15bn. But even these are paltry sums to the insurance industry.

Some companies are just weatherproof.