Trading Hurricane Ike, Gasoline and Oil Stocks
Please Note: This article was originally written on Thursday September 11, 2008. Investors that signed in were sent an email inviting them to join us in selling Valero Energy(VLO) short and buying DUG; an ultrashort oil & gas ETF on Friday 9/12/08.
Our rationale was that there had been an established trend of lower oil prices but the spectre of Hurricane Ike had compelled the market to temporarily bid up the prices of oil and gasoline. We reasoned that the market was over-reacting to the event and that the trend would be reestablished after the storm.
Blue Chip Stock Trader's thesis was correct and we subsequently liquidated our positions the following Monday (9/15/08) at a gain of over 15%.
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Oil Falls, Gasoline Gains, as Ike Heads for Texas Refineries
By Mark Shenk
Sept. 11 (Bloomberg) -- Crude oil fell to the lowest close in five months and gasoline advanced as Hurricane Ike headed across the Gulf of Mexico for refineries along the Texas coast.
The storm is forecast to sweep through the center of the Gulf, missing the offshore Louisiana oil and natural-gas fields. The region is home to 26 percent of U.S. oil output. About 12 percent of U.S. refining capacity is being shut before Ike makes landfall in two days.
``Ike is aimed at the refineries,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``It looks like refiners will be down for a while and the crude will pile up. The result is a strange situation where the products are higher and crude is lower.''
Crude oil for October delivery fell $1.71, or 1.7 percent, to $100.87 a barrel at 2:46 p.m. on the New York Mercantile Exchange, the lowest settlement price since March 24. Prices are up 29 percent from a year ago.
Gasoline for October delivery rose 8.72 cents, or 3.3 percent, to $2.7488 a gallon in New York, the biggest one-day gain since Aug. 27. Heating oil increased 1.31 cents, or 0.5 percent, to settle at $2.9155 a gallon.
Ike's eye was 470 miles (760 kilometers) east-southeast of Galveston, Texas, and moving west-northwest at 10 miles per hour, the National Hurricane Center said in an advisory at 1 p.m. Houston time today. It strengthened to a Category 2 hurricane with sustained winds of 100 miles per hour, up from 80 mph yesterday.
Galveston, parts of southern Houston and areas south of the city and near the coast are under a mandatory evacuation order that started at noon today. The area may see a storm surge of as much as 15 feet.
``We have about 3 million barrels a day of refining in the forecast path of Hurricane Ike,'' said Brad Samples, a commodity analyst for Summit Energy Inc. in Louisville, Kentucky.
Refinery Closures
Exxon Mobil Corp.'s Baytown refinery, the country's biggest, with a capacity of 590,500 barrels of crude oil a day, is in a mandatory evacuation area and the company has begun shutting the facility, according to an advisory on its Web site.
Valero Energy Corp. is shutting its Houston and Texas City, Texas, refineries. The company also reduced rates at its Port Arthur refinery and may decide today if it will shut the plant, said Bill Day, a company spokesman, in an e-mail. The Houston and Texas City refineries can process a combined 375,000 barrels of oil a day, according to the company Web site.
BP Plc is closing its Texas City refinery because of Ike, Scott Dean, a company spokesman, said in a telephone interview. Texas City has a 475,000-barrel-a-day capacity.
Platform Evacuations
Gulf operators have evacuated workers from 78 percent of production platforms, the Minerals Management Service said on its Web site today. The agency estimates that 97 percent of Gulf oil production, and 93 percent of natural gas output, is shut. That is about 1.3 million barrels a day of oil and 7.4 billion cubic feet a day of gas.
CME Group Inc., the world's biggest futures exchange, said it's extending New York Mercantile Exchange electronic trading hours this weekend because of Ike.
The decision applies to energy trades on its ClearPort and Globex trading platforms, CME said in a release today. Trading will begin on Sept. 14 at 10 a.m. New York time with the session closing on Sept. 15. Trading would normally open at 7 p.m.
Brent crude oil for October settlement declined $1.33, or 1.3 percent, to settle at $97.64 a barrel on London's ICE Futures Europe exchange, the lowest since March 4. The futures have dropped 11 straight days, the longest stretch since the contract was introduced in 1988.
Oil's Drop
Oil in New York has fallen 32 percent from a record $147.27 a barrel on July 11 as high prices and slowing global economic growth reduce demand for fuels. Oil's decline led the Organization of Petroleum Exporting Countries to say at a meeting this week it will try to limit production.
OPEC members, who supply about 40 percent of the world's oil, agreed in Vienna to a total production limit for 11 members of 28.8 million barrels a day, unchanged from previous targets. OPEC Secretary-General Abdalla El-Badri said this means it will trim ``oversupply'' by about 500,000 barrels a day.
Crude oil also fell because the dollar gained against the euro, reducing the appeal of commodities as a hedge. The dollar rose to a one-year high against the euro on speculation that growth in Europe will slow more than in the U.S. Investors looking to hedge against the dollar's decline helped lead crude oil and other commodities to records earlier this year.
The U.S. currency climbed 0.4 percent to $1.3946 per euro, from $1.3998 yesterday, after touching $1.3882, the strongest level since Sept. 18, 2007.