Hurricane Gustav is set to bring cheers to the battered oil and commodities market as it heads towards the Gulf of Mexico. Oil prices briefly touched $119.63 per barrel on the New York Mercantile Exchange before falling back to $118.15 a barrel Wednesday.
What is the possible extent of damage from Hurricane Gustav? In 2005, Hurricane Katrina and Rita destroyed 113 offshore oil and natural gas platforms and damaged 457 pipelines, so investors are gearing up for some lucrative bets. Even if there are no destructive hurricanes, slow moving storms can still churn up underground pipelines.
According to meteorological reports, Hurricane Gustav will reach Louisiana and the oil-rich region of the Gulf of Mexico by Sunday. Gustav has evolved several times, from a hurricane to a tropical storm (in Haiti) and now intensifying back to a hurricane again.
Assuming a “normal” hurricane, we can expect oil drilling to halt for at least a week as rig workers are evacuated three days before the storm hits, and when the coast is clear, they have to check for damages before production restarts.
Royal Dutch Shell PLC had already evacuated 400 staff from its off-shore oil rigs and more personnel will follow. It would complete a full evacuation by Saturday. British Petroleum are also planning their own evacuation.
Since there is a real danger of disruption to oil drilling in the Gulf, a rally in oil prices is not surprising. Many energy traders believe oil and commodities are oversold. Since July, the commodities market has reversed suddenly and steeply, catching most of them off-guard.
Elimination of naked short selling on financial stocks, potential government intervention aimed at oil futures speculators, fears of inflation and economic slowdown have worked effectively to crash the party for the oil/commodities bull run.
There are signs that a rebound is due in the near future. While I am doubtful if the $150 psychological barrier will be breached, oil prices have definitely found a firm support level. There are some good news for the oil traders.
In early August, China announced that it was increasing loan quotas for commercial banks. The People’s Bank of China, the country’s central bank, agreed to increase loan quotas by as much as 10 percent to help small- and medium-sized enterprises cope with financing difficulties. Unfortunately, the stock market did not react positively to this news. Neither did the Olympic Games provided any stimulus.
Nevertheless, we can infer that such a policy is pro-economic growth, especially since inflation has taken a backseat with falling oil prices. Low interest rates spur Infrastructure spending and production which will cause a tight market for commodities and thus, higher prices.
Of course, at the end of the day, whether there will be excess inventories and empty buildings due to poor consumer and investor sentiment, followed by a crash in commodities market, is another issue to consider.
Investors can also expect a strong stimulus from the election-year in America. Usually, in such circumstances, the US government will do their utmost to present a respectable report card and that will include doing whatever is needed to prop the financial sector and avoid a major recession. An additional fiscal stimulus package in early 2009 is in the pipeline which will boost discretionary spending.
Speaking of discretionary spending, the latest report on GDP showed that the US government did not do too badly on the economic front. Second-quarter GDP surged to a surprising annual rate of 3.3% compared to 1.9% last month. More business inventories than estimated was registered and trade figures improved, primarily from reduced imports other than oil while exports grew strongly due to a weak dollar.
But before you pick up the phone and start calling your stock broker, I must say the bed of roses has lots of spikes in it. Fact is, the US has not steered clear of a recession. These pretty numbers can only provoke a mini rally in the short term. With a global economic slowdown, that puny gain from export trade isn’t sustainable.
To restore investors’ confidence, the subprime crisis, falling housing prices, massive mortgage write-downs, banks insolvency and credit squeeze, must be resolved. Domestic consumption also has to improve but with shrinking pay and investment portfolio as well as rising unemployment, it will take months before we see a recovery in the real economy.
I am not rushing into the market just yet, just celebrating what Hurricane Gustav can do for the oil traders.