Today marks the first day of hurricane season, the six-month period when volatile weather in the Atlantic most impacts commodity prices. The National Oceanic and Atmospheric Administration is predicting another harrowing year, with up to 18 named storms, six of which could potentially become category 3, 4 or 5 storms.
With floods and droughts already wreaking havoc on crops in the South and Midwest, what can be done to hedge, or even profit from, the weather?
For answers, Breakout turned Terry Roggensack, the co-founder of the Hightower Report. Roggensack says the real impact to the markets from hurricanes isn't likely to be felt until later in the year. The traditional risk is to the oil equipment in the Gulf of Mexico, with traders keeping their eyes peeled for storms rolling into that heavily drilled area. In a slight twist this year, we come into the season with crude stocks relatively high; alas with refinery capacity coming in below expectations and "tightening up the gasoline supply."
The upshot, to Roggensack, is the perception of limited product getting to consumers. In trading, as in so much of life, perception is everything. It's easy, and obvious, to point out that the NOAA's predictions are historically wildly off the mark, but the forecasts do set trader expectations. On the margin, psychology sets the price. In other words, if traders are braced for a huge number of storms, seas of relative calm may have an outsized bearish impact on oil prices (which would be a good thing for most people).
"I can't really put a number on (the relationship between hurricanes and energy prices)," says Roggensack. The flooding in the Midwest, which has dramatically delayed planting of summer crops, has a much more quantifiable trading impact. Less corn planted, less corn to sell, higher prices for corn. Energy prices are a slightly different animal as storms rage around the world -- whether or not they hit rigs or land is unknowable in advance. Last year, for instance, was one of the worst on record for storms, yet few hit land.
As we near the mid-point of 2011, the weather has added fuel to a commodity inflationary fire. If the NOAA's projections are close to reality, traders should brace themselves for a stormy summer.
- Gulf of Mexico