Hurricane Matthew, which reached Category 5 status in the Caribbean, is bearing down on Florida as a Category 3 hurricane and could make landfall along the Southeastern United States over the next day or two. A hurricane’s magnitude of impact is defined by the Saffir-Simpson Hurricane Wind Scale ranging from 1-5, Category 5 having the highest sustained winds (see table below). For those who are directly impacted by this storm or who have loved ones who are, we hope that all stay safe from harm.
However, from an investment perspective, today we look at the potential effects that Matthew may have for energy commodity prices as it impacts the United States. Historical data suggest that following a Category 4 or higher type hurricane generated from the Atlantic Ocean, crude oil (WTI) and natural gas spot prices tend to move higher over the short term-time horizon.
Looking at historical data going back 28 years, after a Category 4 or higher hurricane generated from the Atlantic Ocean makes landfall in the United States (since 1984, this has happened 52 times), subsequent returns for crude oil (WTI) spot prices tended to move higher over the short-term time horizon (see figure below). One month later, the Bloomberg West Texas Intermediate (WTI) Cushing crude oil spot price was higher 59.6 percent of the time with average and median returns of 1.1% and 3.8%, respectively. Looking out over six months, the returns were higher 63.5 percent of the time with average and median returns of 8.4% and 12%.
For natural gas spot prices the opportunity may be more attractive than crude oil. Looking at historical data going back 15 years, after a Category 4 or higher hurricane that is generated from the Atlantic Ocean makes landfall in the United States, subsequent returns also tend to rise over the short-term time horizon. Since 2001, this has happened 29 times. Three months later, the Henry Hub natural gas spot price was higher 58.6 percent of the time with the average and median returns both at 7.0%. Looking out over five months, the returns were higher 58.6 percent of the time with average and median returns of 8.9% and 10.6%, respectively.
Will Mother Nature present us with an opportunity to invest in energy commodities following Hurricane Matthew? One does not know the outcome of the storm until it is over; however, based on historical data it seems possible that potential short-term opportunities may exist for both crude oil (WTI) and natural gas following a Category 4 or higher hurricane making landfall within the United States.