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Schork Oil Outlook: Hurricane Earl's Gasoline Price Impact

Short-term supply shocks vs. short-term demand destruction:
Whose parade will Earl rain on…. the bulls or the bears?

This weekend’s Labor Day holiday marks the end of the holiday driving season, but for some key vacation destinations, the summer is already over. The North Carolina coast is getting clobbered right now by Hurricane Earl. From here, he is expected to wind his way up the Atlantic Coast.

This will, at best, cause a temporary blip in holiday related demand; at worst, bring an abrupt end to the holiday season in popular destinations from the Outer Banks to Cape Cod.

Instead of vacationers flocking to the beach to enjoy the last holiday of the summer, locals at these destinations will be evacuating today. In addition to this event, we will also see artificial demand for gasoline as people top off their tanks (i.e., hoard) as the storm approaches.

More importantly, analysts at The Schork Reporthighlight that we run the risk of (very) short-term supply disruptions as Earl interrupts vessel traffic. To wit, total motor gasoline imports into the East Coast (PADD I) this summer, 0.96 MMbbl/d, are averaging 1.3% above the previous five seasons. Therefore, the temporary disruption in imports along with the spike in artificial demand from hoarders create a template for supply shocks over the next couple of DOE reports.

Bear in mind, the market can withstand these shocks. Per Wednesday’s DOE report, East Coast total gasoline supplies were 64.01 MMbbls as of August 27th. That is 22% above the average of the previous five Augusts. Besides, any shocks to the system will be short-lived. East Coast refineries are not under threat, Earl will pass and imports will show up.

What’s more, extant weather related hoarding robs future demand which in this case, will compound demand destruction from interrupted holidays and unfavorable driving conditions.

Thus, the market will have to factor short-term supply shocks against short-term demand destruction. Either way, the summer is over and supplies are robust.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.