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Paragon Commentary

Futures File: Hurricane Harvey, Gasoline, Gold & Cotton

Sep 01, 2017

Harvey Sends Fuel Flying

As Hurricane Harvey drenched Texas and Louisiana, its destructive path crossed many of the nation’s major oil refineries. Flooding, power losses, and safety concerns forced refineries to close, including the United States’ largest refinery, located in Port Arthur, Texas.

Refinery shutdowns created a short-term supply shortage of gasoline and diesel fuel, which sent prices exploding higher this week. Prices for September gasoline futures gained over 50 cents per gallon, trading to a two-year high of $2.17 on Thursday. Futures prices represent the wholesale value of fuel without taxes, transportation, or other expenses included.

In the past, hurricanes in the Gulf of Mexico would interrupt oil production, sending petroleum prices sky-high, but as oil is increasingly coming from new sources like Canada and North Dakota, oil production in the Gulf of Mexico is less important. As a result, crude oil prices actually fell this week, as refinery closures reduced demand, dropping prices Friday to $47 per barrel.

While damage from Harvey is severe, we can hope that disruptions to oil production and refineries will prove temporary.

 

Rains Ravage Cotton

Cotton fields were flooded by Harvey as well, destroying up to a half million bales of the crop. Even more production could see quality affected, which can drive up demand and prices for commercial-grade cotton.

Most of the damage was wrought in Texas, the source of half of all U.S. cotton, but the storm dumped rain across Louisiana, Mississippi, Arkansas, and Tennessee, hurting crop quality in each of those cotton-growing states as well.

The USDA was projecting a record large nationwide cotton crop of 20.5 million bales this year, but the storm could end up affecting around 5% of the crop, which sent prices over 72 cents per pound for the first time since mid-June.

 

Golden Update

While all eyes were on the devastation in Texas this week, North Korea launched another missile, this time shooting over Japanese territory. That action may have been the latest trigger drawing both speculators and longer-term investors toward gold, which is now this year’s best investment category, outpacing stocks, bonds, and most other commodities.

Though international conflict frequently causes “flight-to-quality” buying, many analysts are also looking at our weak U.S. dollar as a compelling reason to replace paper assets with history’s most solid store of value. These sentiments helped push gold to a nine-month high at $1330 per ounce on Friday.

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