Will Hurricane Sandy Affect Oil Prices?

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Will Hurricane Sandy Affect Oil Prices?
By Sasha Cekerevac for Investment Contrarians | Oct 29, 2012

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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