There’s been a lot going on in the world of US politics and with the recent natural disasters, it’s safe to say it has been an interesting time for business. This is particularly so for oil refineries in the US, with the Motiva refinery (the largest refinery in Texas) having to close, due to the damage from the disaster. The Motiva refinery reportedly supplies 603,000 barrels of oil a day and when we consider that another 18 refineries in the area also had to close down, this totals up to 25% of the United States refinery capacity. Meaning the US is down on 825,000 barrels a day. This reduction in capacity is resulting in an additional lift in fuel prices, while further depressing crude.
So, what does this mean? Well, Hurricane Harvey has had a greater effect on refining than on production and this has been decreasing steadily below gasoline prices. Normally a natural disaster like this would spark fears of a supply crunch and a lift on the price of oil. However, the opposite is happening. This is because the effects of Hurricane Harvey have dramatically reduced the demand for crude oil, from crudes two biggest markets; American drivers and refineries. It’s also important to think about how this could affect the raw materials needed for plastic such as polythene, which could lead to prices increase on a range of other goods including toys, garbage bags and PVC pipes.
So what does this all mean? Well, its reported that although the effects will be relatively short-term and there is enough stockpiled to make a bounce back. However, this does mean short-term business opportunities for exporters in other countries. Currently, U.S crude won’t be leaving the U.S Gulf Coast, meaning buyers will need to seek alternatives, such as buying light grades from West Africa and Southeast Asia. Margins in Europe are also surging with many putting off maintenance to make up for the supply loss in the US.
Although these are arbitrage opportunities, essentially meaning buying security in one market and simultaneously selling it in another market at a higher price and profiting from the temporary difference in price. There are still opportunities to be had for many sectors, some even long term, so let’s take a closer look at the business of disaster.
The wholesale market for cars is currently experiencing a dramatic lift, with over a million cars damaged in the hurricane, there is now a massive scramble of dealers sending cars over to Texas. With the added demand pushing prices up, supply costs are being easily managed, with buyers paying more than the normal market value. The stocks of General Motors and Ford Motor Co. have also reportedly rallied, in the wake of the event amid expectations that post-storm replacement demand could boost deliveries.
Also, although not unusual, in the wake of a disaster, the market for generators and spare parts has soared with widespread power outages across Texas. The market for residential generators rose 23%, which is the first time since 2009 along with requirements for generator parts for hospitals, cleaning suppliers and pumps, which is expected to last long after the clean-up effect.
Even in the days before the hurricane hit, home improvement stores were preparing truckloads of supplies to its stores. Home improvement retailers in the US, will, of course, be well versed in the business of disaster. So could it be that the real winners are the ones that can react the quickest? So far the automotive sector and generator manufacturers and distributors are seeing the results. It’ll be interesting to see what happens with the markets in the coming weeks and how businesses react to these arbitrage opportunities.
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