The calm before the storm?: A little known commodity market where all eyes are on the hurricane season

It’s just been Hurricane Preparedness Week in the US, and while that might not mean too much for anyone living outside of striking distance of the US Gulf coast or Eastern seaboard, it is important for commodity markets.

Oil (and to a lesser extent gas) of course get all the attention. A look at a seasonal oil price patterns shows frequent spikes during the hurricane season (June to November), and although the risk has subsided in recent years as shale extraction has become more dominant, the risk of a disruption to supply remains.

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Related article: The changing of the seasons

The other main commodity market affected by hurricane activity is orange juice. futures. Florida (the second largest orange producer after Brazil) has been in the eye of many storms that have significantly damaged its crop.

And so this is about the time of year that traders typically make seasonal long bets ahead of the hurricane season. Historically, July has typically been the second strongest month with prices on average up by 1.5% (rising ~60% of the time) as market participants prepare for the risk of disruption ahead.

The last time that hurricane’s severely damaged the states  crop was in 2004-05. In 2004, three hurricanes — Charley, Frances and Jeanne — hit the citrus-growing regions of Florida while in 2005 Hurricane Wilma did more damage to the areas. The hurricanes crisscrossed the state in such a way that nearly every acre with citrus groves was affected in some way. In the worst case, trees were uprooted, while in other instances nearly ripened fruit was blown off trees or trees were damaged. Previous to that, the last devastating storm was Hurricane Andrew in 1992.

Expectations matter. And so orange futures prices could move higher over the next couple months as traders try to price in the expected degree of damage risk from hurricanes.

This year at least the risk is looking relatively low. According to Colorado State University’s Tropical Meteorology Project, a “weak to moderate” El Niño is expected to limit tropical storm development over the Atlantic basin for the 2017 hurricane season. Note that the estimated probability of El Niño forming has declined in recent weeks, from almost 70% to below 50% currently.

The university predicts a total of 11 named storms for this year’s hurricane season. Only four of these storms are predicted to be hurricanes; two of these are predicted to be major hurricanes — reaching Category 3 to 5. They estimate that there is a 24% chance a major hurricane will make landfall on the East Coast.

The devil is in the detail however. Even though overall hurricane activity may well turn out to be lower than normal, all Florida needs is one major storm (a return of Charley, Frances and Jeanne) to devastate the crop once again.

For now at least the coast is clear.

 

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Peter Sainsbury

Materials Risk provides commodity market insights across your supply chain by highlighting emerging risks and opportunities and providing advice on commodity buying and managing risk. All views expressed on this website are those of Materials Risk only. See our About page and terms and conditions for more details. Materials Risk was founded by Peter Sainsbury who you can follow on Google+ and Quora