Storms in the Atlantic Ocean weren’t a major worry for the commodities markets in 2018, but this year’s hurricane season, which has seen an early start, may rattle traders’ nerves.
In the past, major storms and hurricanes in the Atlantic have prompted big price moves for commodities, including oil CLN19, -3.11% natural gas NGN19, -2.59% gasoline RBN19, -3.37% grains CN19, -0.74% WN19, -0.39% SN19, -0.03% cotton CTN19, +0.12% oranges OJN19, +3.35% and even lumber LBN19, -1.55%
Roughly a quarter of U.S. refining activity was shut down in the aftermath of Hurricane Harvey, which made landfall on the Texas coast in August 2017. In the weeks that followed, oil and gasoline prices climbed. “If it’s a busy hurricane season, it can affect all the markets, but there are different times of the year when different commodities feel it harder,” says Craig Turner, a senior broker at Daniels Trading.
In terms of energy infrastructure, it matters not just where storms hit, but also when. Some energy commodities are “more sensitive than others,” says Turner. Oil would probably take a bigger hit from a storm early in the season, when summer travel boosts gasoline demand, while a later-season storm could tighten natural-gas stockpiles just as the market prepares for winter heating season, he says.
A recent report from the National Oceanic and Atmospheric Administration predicted that this year’s Atlantic hurricane season, which officially runs from June 1 to Nov. 30, may see between nine and 15 named storms, of which four to eight may become hurricanes with winds of 74 miles an hour or higher. Of those, two to four may become major hurricanes with winds of 111 miles an hour or higher. Andrea, a short-lived subtropical storm, formed on May 20, kicking off the season early this year.
“If there’s a major hurricane later in the season, both orange juice and lumber would be most impacted if there was a strike in Florida,” says meteorologist James Roemer, president of commodity trading adviser BestWeatherInc.com. Meanwhile, a hurricane in Louisiana “would have more of an impact on soybeans and cotton,” where 5% to 10% of those crops may be hit by heavy rains in that state and in Mississippi, says Roemer, adding that there’s “a lot of weather right now affecting commodities that is not being influenced by hurricane activity.” The Midwest, for instance, has been inundated by floods. A hurricane “would only worsen the crop situation” if it hits the Midwest, he warns.
The energy market has often absorbed the brunt of a hurricane’s wrath. The most closely watched area is along the Gulf of Mexico between Corpus Christi, Texas, and Pascagoula, Miss., says Denton Cinquegrana, chief oil analyst at IHS Markit’s Oil Price Information Service. While the focus would be on refinery or production outages and pipeline issues, a storm that misses infrastructure, he says, can still cause temporary “gasoline demand destruction,” as businesses close and roads flood.
Hurricanes can also raise natural-gas production concerns, says Jeff Klearman, portfolio manager at exchange-traded fund issuer GraniteShares. He points out, however, that prices for natural gas initially fell by some 2% following Hurricane Florence, which hit the Carolinas last year, because of “wide-scale power outages and reduced demand for electricity.”
A good way for investors to get “hurricane exposure” may be through an investment in a broad-based commodity index fund, which “provides exposure to a diversified basket of commodities,” he says. One such fund is the GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF COMB, -0.72%