Hurricane Fuels Refinery ETFs More Than Oil

August 31, 2017

The energy sector can't catch a break. Still reeling from the worst oil price collapse of the modern era, the industry just got hit by another hammer in the form of Hurricane Harvey. This week, the monster storm wreaked havoc on Texas, while shuttering countless oil wells, natural gas wells and refineries in the state and surrounding areas.

On a personal level, hurricanes like Harvey are nothing but horrific, with the incalculable damage they inflict on people and property. But when it comes to energy stocks, these storms are sometimes a boon. In 2005, when Hurricanes Katrina and Rita swept through the Gulf of Mexico before making landfall in the U.S., energy prices surged to record highs, pushing energy stocks up along with them.

This time, there's been no such lift for the beleaguered energy sector. Oil prices hit a one-month low around $46 on Tuesday, and the Energy Select Sector SPDR Fund (XLE) traded close to its lowest level of the year, down 15.8% year-to-date.

 

YTD Return For XLE, WTI Crude Oil

 

Energy is by far the worst-performing stock market sector of 2017 and, along with telecom, is only one of two sectors in the red for the year.

Demand Destruction

On the surface, it may be puzzling that energy prices and ETFs have fallen despite significant disruptions to supply. According to a Barclays report published on Tuesday, more than 500,000 barrels per day of oil production and 1.5 billion cubic feet of natural gas production is offline due to the storm.

However, traders may be shrugging off these disruptions because the negative hit to demand from the hurricane may more than offset the supply losses.

"At this point, the market appears to have determined that oil demand impacts may outweigh the supply-side impacts," said the authors of the report. Flooding, destruction and high fuel prices cut oil demand by almost 1 mb/d in the aftermath of the 2005 hurricanes, roughly twice as much as the usual seasonal downturn from August to September, they pointed out.

 

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