Pro Perspectives 8/24/20

August 24, 2020

We talked about crude oil late last week. Let’s continue on this theme today, as two supply disrupting storms make their way through the Gulf of Mexico. 

As we’ve discussed, oil has been disconnected from a very hot stock market. Stocks are hitting new record highs.  Oil prices are down 35% from the highs of the year. 

Apple, the biggest company in the world, has doubled in value (to over $2 trillion over the past two years).  The value of crude oil has been nearly cut in half over the same period.  

Meanwhile, we are in the early stages of an aggressive bounceback in economic growth (projecting +26% annualized for Q3, at the moment).  The dollar is falling, and inflation is brewing, as money pours into popular inflation hedges (with gold and silver leading the way). 

And yet, crude oil (globally traded primarily in dollars) trades just in the low $40s.  

Is it lacking a catalyst?    

Well, historically, supply disruptions are often a powerful catalyst to get oil moving. 

And we may now have a catalyst. 

With the storms in the gulf (or on that path), over 100 rigs have already been evacuated, accounting for 58% of the oil production in the Gulf.

What could it mean for oil prices (in combination with the backdrop we laid out in the above)?

Let’s take a look back at oil prices from August of 2017, when Hurricane Harvey, a category 4, tracked through the Gulf and devastated Texas.

Harvey hit over the weekend in late August of 2017. It was a big one. Both offshore platforms, and onshore refineries were hit hard.  The fallout was assessed over the following days, and by the end of the week, the bottom was in for oil.  Within 12 months, crude was trading over $70.