By: James Roemer |
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Tropical force winds may affect New Jersey-New York City area early next week with possible hurricane force winds near Long Island or Boston. This may shut down some refinery operations in the Northeast for a couple days and could have a positive short term influence on gasoline prices. Thousands of people could be without power early next week from New Jersey to Long Island and Southern New England depending on the actual storm track.
Hurricane Sandy May Give Gasoline Prices a Short-Term Lift.
Worries over a possible slow-down in the global economy, a stronger U.S. dollar, OPEC expected not to cut back oil production, and the U.S. becoming more reliant on its own oil production have all attributed to the 12%+ collapse in crude oil prices the last few weeks. The ETF (CRUD) had taken it on the chin. One factor that could potentially stop the bleeding in the energy sector, other than a weakening U.S. dollar or rebound in the global economy, would be if the United States, Europe and/or China have a cold winter. In the short term, the impact of hurricane Sandy could create some minor concerns with refineries in the Northeast U.S. early next week. The gasoline ETF (UGA) is probably set for a bit of a rally.
Nor’easter Monday/Tuesday may be one for the October Record Books
From a weather standpoint, the more immediate bigger concern to the energy market (particularly gasoline) will be the potential impact of another “Perfect Storm” that could result in power outages early next week from New Jersey, New York City, Massachusetts and much of southern New England. Potentially, hundreds of thousands of customers may be without power by later Monday and Tuesday.
Tropical storm Sandy will become extra-tropical (lose her tropical characteristics next week), but will move north and expand her coverage of rains and tropical storm force winds along the east coast. Surface pressures in the center of the storm (above) could rival a category 1 hurricane. I would expect winds to be mostly in the 40-60 MPH range in some of the big Northeast cities by Monday. There is the potential for occasional wind gusts to near hurricane force across Long Island to Boston by Monday/Tuesday.
Refinery Capacity May be Briefly Affected in the Northeast By the Remains of Hurricane Sandy On Monday/Tuesday
If you recall, hurricane Irene which lashed New Jersey and New York in August 2011 left New Jersey’s PSE&G utility company (PEG) and Con Edison (ED) in disarray for days. The storm was a bit over-hyped by the media in my opinion. However, the storm for early next week is barely even being talked about yet and could be worse than many are thinking along the east coast. As much as 4-7% of the U.S. oil refining capacity could be affected.
Some refiners with operations in PADD1 include Sunoco (SUN), ConocoPhillips (COP) and a unit of Royal Dutch Shell (RDS.A). There may be some short term concern in the energy market by early next week with respect to the remains of Sandy as it comes close to the east coast. Gasoline prices are beginning to rally.
The remains of Sandy could damage docks and close down the New York Harbor. If so, there would be no way to deliver on some gasoline futures contracts and gasoline prices would rally. Though this scenario usually only happens on extremely rare occasions during hurricanes near New York City, I still expect some ‘psychological fear’ arising about this storm as we get closer to next week.
Electrical Power Outages and Why the East Coast May see more Storms this Winter
Electrical power outages, surges and spikes bring about more than $150 billion in annual damage to the U.S. economy. Every year, an estimated $104 billion to $164 billion goes down the drain due to power interruptions, while another $15 billion to $24 billion is lost on account of poor power quality such as voltage fluctuations, power surges and spikes. Specifically, industrial and digital business firms suffer losses amounting to $45 billion annually. Some industries, such as manufacturing, can lose as much as $6.45 million per hour of downtime.
In New York, in the months and years ahead, there are some fears that coal and nuclear power plant retirements could lead to longer term transmission and generation problems. This would increase the risk of power outages in the future. The Indian Point plant, which supplies about one-quarter of the power used in New York City and Westchester, continues to have supply problems and may be retired in the coming months. This makes storms that have the potential to create power outages that much more serious.
Potential big storm impacts next week may be felt on the shoulders of National Grid (a private company). They are the largest electric and gas company in Massachusetts, serving over 3.3 million people throughout New England. National Grid is also the largest distributor of natural gas.
More than likely, warmer ocean temperatures in the Atlantic and other meteorological factors could contribute to a very stormy, colder eastern winter this year. This means that power outages will be more frequent and could have some adverse economic impact. It may also mean that later on, natural gas and heating oil prices find a floor in prices.