This has been a long hurricane season in the Atlantic.
When Tropical Storm Zeta formed two days ago, it represented the 27th named storm of 2020, matching the highest-ever total since 2005 – a year that also saw a record 3 Category 5 hurricanes (Katrina, Rita, and Wilma) that combined to cause over $100 billion in damages.
Thankfully, 2020 has only had one storm grow to close that size, which was Hurricane Laura back in late August. But we’ve also been a bit lucky with regards to where these storms have hit as they’ve mostly stayed in the western part of the Gulf of Mexico, thereby avoiding the vast majority of offshore oil infrastructure and important refineries.
At a very first glance, however, Zeta is charting a path that appears to be a little more concerning to residents of my absolute favorite city in the world – New Orleans, Louisiana. And unlike Laura or some of 2020’s other storms, there are also some important operations in its path.
That said, if we were to take a look at Zeta’s vital statistics – wind speed, storm speed, storm surge, and total precipitation – it does not appear to be as large a threat.
Wind speed is set to top out around 80 miles per hour (low Category 1), and while some areas of Mississippi may see as much as 8 feet of storm surge if landfall occurs during high tide, it appears that my beloved NOLA will likely be able to handle any impact.
Moreover, storm speed appears to be reasonably quick, and will move from landfall up through the Tennessee/North Carolina border area within 12 hours.
That means that total precipitation is also likely to be subdued across the storm’s path, with only 3-5 inches of rain forecast for the heaviest areas, versus 8-12 for a larger storm like Hurricane Laura.
Given how small this storm is, it wasn’t exactly surprising to read that refineries plan to keep operations open all the way through.
It was very surprising, on the other hand, to see oil prices catch a bid today and jump up to approach the $40 per barrel mark before settling around $1 lower.
Because of that, I wanted to take one last look at oil fundamentals before deciding whether to capitalize on this last hurricane fake-out of the season.
Surprise! Oil Markets Still Look Terrible
Typically the first item I’ve been looking at this year to take on this analysis is Google Mobility Data. And since the Labor Day weekend, we haven’t seen much of a fundamental change, except that people aren’t traveling as much to parks as kids return to school and the weather gets cooler.
Source: Google, Seawolf Research
And when we zoom in on gasoline demand versus mobility around retail locations, we can see that while the correlation has been incredibly close in the past, activity has been flat recently. Though there is a bit of a rise in gasoline demand, I suspect it is more due to parents driving their kids to school versus having them take the school bus.
Source: Google, Seawolf Research
And even with that rise, gasoline demand remains at seasonal lows not seen since 2013.
As we head into winter, people will not only drive less in general, but they also are likely to spend more time indoors, thereby risking greater exposure to COVID-19. And given we’re already seeing COVID-related lockdowns get implemented in Europe, it’s only a matter of time that some states consider them here as well.
The current outbreak taking place in the upper Midwest is a perfect example of that risk.
Source: Seawolf Research
Lower demand for gasoline means lower demand for crude oil. And although US production has been in decline, it has leveled out around the 10 million barrel/day level.
Moreover, storage levels remain at all-time highs.
And worse, storage levels at Cushing, Oklahoma – where the West Texas Intermediate grade is priced – are working their way back toward the upper limit of available space.
As such, it’s only a matter of time before these prices implode, and today’s hurricane action gives us one last chance to add another ½ stake to our short position in Proshares UltraShort Bloomberg Crude Oil (NYSE: SCO) before market conditions start to get bad again.
While I’m at it, I want to pick up another ¼ stake in DHT Holdings (NYSE: DHT) as another play on storage, and a full stake in Direxion Daily MSCI Emerging Markets Bear 3X Shares (NYSEArca: EDZ) as emerging markets will be seriously pressured in the event of a collapse in crude pricing.
Also, I want to sell our positions in ProShares Long Online/Short Stores ETF (NYSEArca:CLIX) and PNC Financial Services (NYSE: PNC) as both the discretionary and financial sectors are hitting headwinds without stimulus, and we should capture 23% and 13% respective gains there before markets get weird after next week’s election.
So, batten down the hatches once again, everyone, and buckle up for a wild ride over the next 8 days.
All the best,