An Important Update On Hurricane Harvey And The Commodities Market
It’s been a soggy week here in northern Louisiana, but it’s nothing compared to the torrential rains and devastating storm damage brought ashore by Harvey. The monster category 4 hurricane slammed into the Texas coast late last Friday, unleashing 130 mile-per-hour winds — the strongest storm to make landfall in this part of the country since 1961.
Meteorologists will tell you the warm 85 degree seawater and absence of upper-atmosphere wind shear provided perfect conditions for rapid intensification. But unlike other storms that barrel in and quickly move out, this one has stalled out — dumping what some have described as “biblical” amounts of rain.
My sister in-law, who lives on the coast in Galveston (just south of Houston), reported 20 inches of rain… and that was just over the weekend. Some nearby counties saw more than 30 inches over the same time. Incredibly, this week has seen the storm hover over an already devastated Houston — dumping additional feet of rain in many areas.
Anytime you get a year’s worth of rain in the span of a few days, epic flooding is to be expected. You’ve probably seen some of the pictures. Of course, my first concern is for the safety of those in the path of this historic event. But as damage assessments start coming in, it’s clear that Harvey’s wrath is also taking a heavy toll on the nation’s energy infrastructure.
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Hitting The Heart Of American Energy
It couldn’t have hit a worse place to inflict maximum pain. These waters are teeming with offshore production platforms and pipelines, and the southeast Texas coast is also the nation’s crude oil refining hub. Then there are storage terminals, petrochemical plants, and liquefied natural gas (LNG) export facilities.
Here’s what we know thus far.
#-ad_banner-#Exxon Mobil’s (NYSE: XOM) Baytown, Texas, refinery is partially inundated and temporarily closed. Located near the massive Houston Ship Channel, this is the nation’s second-largest refinery, capable of churning out 560,000 barrels a day of gasoline and other finished products. Several others have shut down operations, including Marathon Petroleum’s (NYSE: MPC) 459,000 barrel per day refinery in Galveston Bay.
The Gulf Coast is home to approximately one-third of the nation’s total refining capacity, and many facilities were right in the storm’s bulls-eye. According to a report by S&P Global Platts, at least 10 plants are closed at this time — we’re taking about 2.2 million barrels of daily refining capacity offline, or 15% of the nation’s capacity.
And it’s not just refining that is taking a hit. CNN reports that 105 offshore oil and gas platforms have been evacuated. Nearly one-quarter of the Gulf of Mexico’s crude production (380,000 barrels per day) has been halted. There has been a similar disruption with regard to natural gas output.
In past storms, the impact on production has been fleeting. The bigger concern is refining. Fortunately, there are tens of millions of barrels of gasoline in storage, enough for a 24-day supply. That will help prevent a supply shock.
Some of the shutdowns were precautionary, while others have been forced to close simply because roadways are impassible and employees don’t have access (no indications yet of major structural damage). Still, it will take time to dry out and make repairs.
Gas Prices Will Spike
I was in Houston during Hurricane Ike in 2008, and it took Exxon Mobil’s Baytown refinery more than a month to get up and running again after that storm. This shutdown could be just as crippling. For perspective, gasoline prices spiked 30 cents per gallon in the wake of that storm — and more than 70 cents after Katrina.
So get ready to pay more at the pump. Over the weekend, gasoline futures prices jumped 7% in Asian markets. Interestingly, crude prices have fallen, suggesting that many traders are shorting oil and buying gasoline to play a widening crack spread.
This is a speculative short-term tactic, not really something I engage in within my premium newsletter, Scarcity & Real Wealth. But time will tell if the ramifications deepen. According to The Wall Street Journal, 17% of gasoline produced from Gulf Coast refineries and 39% of the diesel fuel is exported overseas. Several marine terminals in the Corpus Christi area remain closed, disrupting deliveries to Latin America and other markets.
So we’re starting to feel the impact worldwide.
How To Protect Your Wealth
The portfolio I’ve put together in Scarcity & Real Wealth contains several companies that operate in Harvey’s path. But this doesn’t mean I’m jumping ship just yet.
If we look at past disasters as a guide, we see that disruptions in oil production resulted in surging gas prices. However, we can also see that prices usually return to previous levels within two to four weeks of reaching a peak.
So, while damaging in the short-term, Harvey’s influence in the energy sector likely won’t be felt beyond the next month or two — at least as things stand at the moment. I can safely say that there is no need for long-term investors to make any hasty decisions right now.
That said, our picture of the toll Harvey has taken on energy infrastructure is hardly complete. It’ll take a few weeks for the dust to settle and the markets to react to whatever new facts might emerge. Significant disruptions in oil or natural gas production could have wide-reaching implications if the situation turns out worse than expected.
During that time, I’ll be keeping up with new developments as they relate to my Scarcity & Real Wealth holdings, and letting my readers know if they need to take action to preserve their portfolios. Even better, I’ll also be letting them know about new wealth-building opportunities that emerge in the weeks and months to come…
This Is Why “Pick And Shovel” Stocks Are So Important
This brings me back to something I’ve been talking to StreetAuthority readers about quite a bit lately — what I call “pick and shovel” stocks.
Pick and Shovel stocks are the companies that make the tools and infrastructure needed to extract, refine, or transport commodities, rather than the risk-heavy companies actually selling those commodities. You may remember this term from the gold rush of the 19th century: It was rare for a gold prospector to strike it rich, but just about every seller of picks and shovels was doing a brisk business.
As Harvey’s destruction halts oil and gas extraction, the resulting surge in oil prices will actually boost some companies’ bottom lines, bringing returns that will be passed on to shareholders. But the real story is the reconstruction of Houston and surrounding areas, a long road that will be a boon for construction companies.
This last part fits into a much larger trend in our country, one that will see trillions of dollars of spending over the next decade, quite possibly making it the biggest investment opportunity of our generation. Our nation’s crumbling infrastructure is in serious need of repair, and the government will be forced to spend an obscene amount of money getting it back up to snuff.
For companies involved in this reconstruction, it’s practically a government license to print money. But which companies are uniquely positioned to receive this windfall? That’s where my Scarcity & Real Wealth newsletter comes in.
I’ve spent months scanning the market for emerging opportunities in this space. And so far, it’s worked amazingly well — a 28.5% return in 2016 alone. If you want to learn more about my favorite Pick and Shovel ideas, as well as gain access to my full portfolio of market-crushing resource stocks, I invite you to click here.