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!
VEL-3X INV NG (DGAZ): ETF Research Reports
PRO-ULS DJ CRUD (SCO): ETF Research Reports
PRO-ULT DJ CRUD (UCO): ETF Research Reports
VEL-3X LNG NG (UGAZ): ETF Research Reports
US-NATRL GAS FD (UNG): ETF Research Reports
US-OIL FUND LP (USO): ETF Research Reports
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