WASHINGTON, August 28, 2017 – In Friday’s column, we offered our highly skeptical opinion that NOAA, Weather Channel flacks, CNBC and other MSM and government news and information sites were over-hyping the latest looming hurricane and would be proved ridiculously wrong in fairly short order. However, when it came to Hurricane Harvey, the “ridiculously wrong” hat belongs to us.
Harvey did, in fact, escalate to a Category 3-4 storm at least briefly, but that wasn’t the half of it. In fairly short order, the storm de-escalated to “tropical storm” status, often a good sign for those living within a storm’s projected “cone” as it moves along and slowly fizzles out.
But that’s not the case with Harvey. It’s been hunkered down like a Wrath of God nightmare, dumping oceans of rain on the entire East Texas region, with the center of the storm circling around again and again, flooding everything in sight with no end in sight.
The property destruction and human tragedy is already epic, and may expand by an order of magnitude before this storm finally decides to dissipate. Whenever. But, given this column’s financial focus, even as individuals try to pick their lives back up again, the damage to a surprising number of major and minor corporations will be substantial, pernicious, and sometimes even difficult to foresee.
The initial impact of Harvey is, not surprisingly, on American oil drilling, exploration and conglomerate businesses encompassing the domestic oil sector. That’s because Houston is the endpoint for an incredible number of oil pipelines, given the massive concentration of refineries located in that area and just across the border in Louisiana as well. (It’s also a major U.S. Gulf port.)
Refineries in the area, belonging to numerous huge companies that are prominent on the New York Stock Exchange, have largely been forced to shut down as a safety and preventative measure. Some refineries may be damaged, some seriously enough to delay restart, perhaps for months, as they undergo repairs.
But in tandem, with crude oil pipelines shut down, given the likely inability of the oil therein to get processed in Houston, numerous oil wells, shale and otherwise, will have to be temporarily shut down as well as there’s effectively no place for the oil to go at present.
The obvious backup of crude supplies will tend to rapidly depress oil prices, at least in the short term. However, the exact opposite will likely happen to gas prices at the pump, which may soar near-term due to sudden constraints in supply. Whether American families live near the storm’s epicenter or far away, they’ll see these gas price increases in fairly short order.
The crude-oil/gas equation could quickly reverse itself even by next week if equipment and supplies can get back on line quickly. But nobody really knows for sure at this point, since Harvey’s “Noah’s Flood” rains will likely continue to drown the area until at least mid-week.
CNBC’s online site departed from its usual anti-Trump lineup of fake news this morning to sort out Harvey’s effect on oil patch stocks in Monday morning trading action:
“Shares of oil refinery companies rose on Monday after Harvey, a Category 4 hurricane, forced refineries in Houston to shut down.
“Harvey, a hurricane that was later downgraded to a tropical storm, ravaged Houston and other parts of Texas over the weekend, with more than 30 inches of rain falling in some parts in just 48 hours. Houston is home to several of the major U.S. refineries.
“‘With some of the major refineries closing down in Houston, we’re seeing fireworks in gasoline prices, a move which is being reflected in refinery stocks,’ said Peter Cardillo, chief market economist at First Standard Financial.
“RBOB* gasoline futures for September delivery jumped as much as 6.8 percent on Monday before trading 4.15 percent higher at $1.7357 per gallon. U.S. crude futures for October delivery, meanwhile, fell 3.3 percent to $46.26 per barrel.
“Shares of Valero Energy [symbol: VLO], Phillips 66 [PSX] and Marathon Petroleum [MPC] all rose in midday trade.”
Directly and indirectly related stocks are also getting helped or hurt by the storm and its presumed aftermath. Utilities with the bulk of their resources in the path of any big storm usually take a hit. However, the Houston area’s primary electric utility, CenterPoint Energy (CNP), has been barely nicked as of 1 p.m. ET Monday (noon Central Time), perhaps due to its longstanding sterling reputation in the industry for quality and service.
As CNBC notes, major refineries are actually up Monday. Even though many of them are experiencing some shutdown activity in the Houston area, most of their refinery facilities elsewhere will remain operational. With gas prices likely to spike this week and perhaps next, they’ll be able to sell all the gasoline and diesel fuel these still-open facilities can crank out and make above average profits in the process.
Other companies that will clearly benefit include massive hardware-home improvement retailers, primarily Home Depot (HD) and Lowe’s (LOW). These companies, will likely experience a massive upsurge in sales at their East Texas emporiums once most of the flooding heads out to sea and homeowners head back to see what they’ll need to contract for or buy to get their homes – or what’s left of them – back to habitable condition.
On the other hand, property-casualty insurance companies will take a big hit, as they’ll likely be shelling out substantial amounts of settlement money for home and business owners in the Houston area. This will get frustrating and complicated, as coverage will likely be dovetailed in many cases due to coordinating benefits with Federal flood insurance coverage. But eventually the money will flow out of insurers’ pockets and into the hands of their desperate policy holders eager to get their homes back in working order.
UPDATE: Travelers (TRV) shares were clobbered today largely due to the Harvey Effect, and this Dow stock closed down approximately 2.38 percent, enough to put the Dow Jones Industrials down by 5.27 points at the 4 p.m. closing bell.
We’ll keep an eye on things over the next few days and see how this all sorts out, stock market-wise. In the meantime, our best wishes to the people in East Texas.
We went through something like this decades ago as Hurricane Agnes hunkered down in the Washington, D.C. metro area for what seemed like weeks, dumping rain and flooding everything in sight as if it was the End of Days. It’s horrible, depressing, and seemingly hopeless when it happens. But the sun will eventually come out, tomorrow.
And, on a more positive note, we also know that once the waters reside, real Texans will roll up their collective sleeves and get things back to normal in Houston much faster than anyone could ever think possible.
*NOTE: “RBOB” is industry jargon for “Reformulated gasoline Blendstock for Oxygen Blending,” which, perhaps oversimplified, essentially means the gasoline you purchase at the pump.