“The Costliest And dreadful Affair”…Final Part :)

Continuing the Hurricane “costliest & dreadful affair”…………….. 🙂

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“Major affected areas”…it’s a nightmare for North and South America, and it comes from north-African low pressure systems and moves west. The Caribbean, Mexico, and United States are most often hit by hurricanes. Nearly half of U.S. oil refining capacity is located in hurricane affected areas.

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“Dreadfully risky business for insurance companies”…I hope every year insurance companies pray for clear weather for hurricane affected area. Imagine, insurance companies paid $66 billion for Katrina loss and it was the costliest disaster in the history of insurance. Louisiana accounted for 63 percent of insured losses and Mississippi accounted for one-third. On the contrary, it’s a boon for construction industry.

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“Makes big hole…effect on economy”… hurricane like other natural disasters, disturb the economic activity of regions in many ways as business activity is interrupted and infrastructure is destroyed. Approximately, single hurricane Katrina cost around $125 billion, with $66 billion in insured losses. It affected 19% of U.S. oil production. Power and energy companies’ financial condition gets damaged due to hindrance in production and supply activities amid storm restoration costs. Shipments also get affected and we know that nearly two-thirds of all oil processed by the region’s refineries arrives via ship, hence any natural disturbance will result in supply disruption. The Gulf’s ports are trading points for over 20% of cargo tonnage in the US.

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“Destruction…the ripple effect of hurricane”… just imagine the total loss, done by hurricane in US that single hurricane Katrina and Rita destroyed 113 offshore oil and gas platforms and damaged 457 oil and gas pipelines. Hurricanes Katrina and Rita reduced oil production by 103 million barrels and natural gas output by 610 billion cubic feet. But this is not enough; Katrina also struck the heart of Louisiana’s sugar industry, with an estimated $500 million annual crop value and made 75000 people homeless. Entergy New Orleans also filed for bankruptcy protection on September 23, 2005.

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“Impact on commodity…higher energy keeps inflation at higher side”… hurricane affected areas produces about 15% of US supply of natural gas and 7% of its oil. The Gulf of Mexico is responsible for 13% of the U.S. natural gas production (and 30% of its domestic crude oil production). Any supply disruption gives a leap to the crude and natural gas prices. By and large we observe price of crude oil and natural gas augment during the period of June to October. It’s a very active time for speculators and we can see the changes in front month contracts based on weather forecasts. Crude already zoomed up to the level of $87.15 on 3rd May, 2010. Now it headed towards quarterly decline since 2008. But there are major factors, which will keep the fire on in energy complex. Hurricane Alex has already hit this season and 20 more hurricanes of different categories are expected to hit in 2010. Hence any news of hurricane would fuel the prices. Driving season in US has already begun, which is the time, when money managers prepare to pull their sleeves to build a large position in crude. Furthermore ongoing summer season can give additional strength to the prices. Hence these factors will keep the crude prices at higher side but any weak economic indicator will cap the upside.

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In nutshell, nobody desires to get up with the news that hurricane is heading towards Louisiana when the entire world is struggling to overcome its financial problem. Whenever hurricane season starts it hoist, there is a fear of price rise of crude oil, which is not at all upbeat for the economies already in poor health. Traders start to quit their short positions. When you see a significant changes in the position of traders near June or July months, then you can assume simply that hurricane is about to knock the US field and money managers are preparing for a wild movements!!!

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