Does Hurricane Isaac Make Oil a Buy?

Zacks

Over the past few years, residents along the Gulf and Atlantic coasts have been relatively luckily when it comes to Hurricane season. There hasn’t been a Category Five storm for five years, and the Category Four storms have pretty much missed making landfall in the U.S. over this time period as well.

Thanks to this trend, many of us in the rest of the country have largely forgotten how destructive and disruptive these storm systems can be. However, we may get a rude reminder later as Hurricane Isaac makes landfall, probably somewhere over the Louisiana and Mississippi coasts.

While the storm doesn’t look like it is going to be anywhere near as powerful as Katrina, the 2012 storm is pretty much paralleling that 2005 storm’s path and is also likely to hit the coast nearly seven years to the day after Katrina made landfall. Still, the sudden shift away from the Florida panhandle and towards the central Gulf may catch some of the oil and gas producers off guard and could result in more damage to this infrastructure.

In fact, just a few days ago, the government revealed that Gulf oil production was down 24% while natural gas production was down 8% in the crucial region. With this backdrop and the prospect of more rigs being evacuated as the storm intensifies and approaches, investors could see a short-term supply crunch in the oil and gas markets.

This trend could put major oil and gas producers in focus, as well as a number of commodity ETFs tracking energy products. UNG and USO remain extremely popular ways to, respectively, track natural gas and oil, but there are also some leveraged options as well (read Natural Gas ETFs: Futures vs. Equities).

In the natural gas world, VelocityShares has triple long and triple short products for the natural gas market UGAZ and DGAZ, although it should be noted these don’t exactly trade the most frequently. Meanwhile for oil, investors have more options although the most popular are in the 2x/-2x market, with funds such as UCO for double long exposure and SCO for double short exposure.

(Don’t forget that all these rebalance daily! Read more about how this phenomenon can impact returns in Understanding Leveraged ETFs)

Personally, I was this close to rolling the dice on a few leveraged ETFs, but I am just not buying into the hype this time around. The storm isn’t looking to be anywhere near as powerful, and I am worried that people are just getting too caught up in the Katrina path/time similarities to look at this situation objectively.

For this reason, I think we could see a short-term spike in oil and gas but then a huge drop back if the damages aren’t anywhere near what was expected. Of course all bets are off if the levees break in New Orleans again, but hopefully this will not be the case this time around, making oil and gas too volatile for me (see Three Low Volatility ETFs for Stormy Markets).

What do you think? Will Isaac wreck havoc on crucial oil and gas infrastructure in the Gulf or will the storm be a relative lightweight?

Let us know what you believe in the comments below!

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Read the analyst report on UCO

Read the analyst report on SCO

Read the analyst report on DGAZ

Read the analyst report on UGAZ

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