How Hurricane Harvey Will Effect Energy ETFs

Hurricane Harvey devastated parts of Texas, and displaced thousands of people from their homes. Now, there are many out there who are trying to pitch in to help those who are stranded from the hurricane, but it’s going to be difficult due to the gas shortage. Hurricane Harvey not only affected many people’s lives, but it’s also going to impact the U.S. economy. Specifically, Hurricane Harvey impacted the energy sector. Now, markets will be focused on energy stocks and exchange-traded funds (ETFs) in the aftermath of Harvey, as motorists are feeling the wrath of Hurricane Harvey, even though a bulk of them didn’t have to go through the grueling experience.

Hurricane Harvey is Affecting Fuel Prices

Hurricane Harvey is causing prices at the gas pump to rise, after more than a does refineries across the Gulf Coast went offline. Energy companies like Exxon Mobile Corporation (NYSE: XOM), ConocoPhilips (NYSE: COP), Valero Energy Corporation (NYSE: VLO) and Royal Dutch Shell have shut down refineries that were directly affected by Harvey. Now, Colonial Pipeline had to limit flows on its system, limiting the amount of fuels being sent into the line, and motorists across America are starting to see higher prices at the pump.

Henry Hub Natural Gas futures for delivery in October 2017 spiked after the Hurricane hit, and traded above $3 .

Major Gulf Coast refiners, VLO and Royal Dust Shell indicated to wholesale customers that they don’t have enough gas or diesel to sell. That in mind, there’s clearly a shortage, coupled with a high demand for gas and diesel, which is sending gas prices higher. In parts of Texas, it’s getting to a point where locations don’t have gas at their pumps, and the ones that do have gas are seeing long lines and a limited selection of gasoline. People are waiting hours to fill up their tanks.

Now, it’s one story when refiners are offline, but when pipelines shut down, it’s a completely different story. Hurricane Harvey has cut the U.S. fuel-making capacity by nearly 25%, which is the lowest level the U.S. has seen since 2008. In addition to affecting Texas refineries, Harvey also hit Louisiana, and some of the largest refineries in that area have also shut down. Refineries in Louisiana are expected to go offline or operate at lower rates. The hurricane has caused a ripple effect, and the economy is expected to be significantly affected, as gas prices start to rise.

That in mind, market participants are already pricing this in, and the aftermath of Hurricane Harvey is affecting energy exchange-traded products (ETPs).

Hurricane Harvey is Affecting Energy ETPs

The VelocityShares 3X Long Natural Gas ETN (NYSEARCA: UGAZ), which aims to provide investment results that are three-times the daily performance of the S&P GSCI Natural Gas Index ER. The fund’s underlying index tracks global natural gas producers in OECD countries, based on a production-weighting scheme. That in mind, with natural gas prices rising, UGAZ has seen a large spike in its price.

For those looking to trade or invest in UGAZ, there are a few key factors to take into account. UGAZ is a leveraged ETN, so it could have exaggerated moves, and therefore, market participants need to have a high risk tolerance to trade this name. Moreover, UGAZ only looks to provide investment results corresponding to three-times the performance its underlying index for a one-day period only. Therefore, those who are looking to hold UGAZ for periods longer than one day may see the performance of UGAZ and its underlying index deviate.

Moving on, the United States Natural Gas Fund, LP (NYSEARCA: UNG) is also surging, after Hurricane Harvey has caused multiple refinery shutdowns, as well as major pipeline closings. Now, the United States Natural Gas Fund seeks to provide investment results corresponding to the percentage changes in natural gas prices, specifically the price of natural gas delivered at the Henry Hub, Louisiana.

To provide these investment results, UNG invests in natural gas futures contracts, but it could also use derivative securities to track the percentage performance natural gas prices. Currently, the United States Natural Gas Fund is holding NYMEX Natural Gas and ICE Natural Gas futures contracts expiring in October 2017, as well as some U.S. Treasury securities.

If you look at the highlighted rectangular area in the chart above, this spike was attributed to shortages in natural gas caused by Hurricane Harvey. Now, this problem isn’t expected to be solved overnight, so UNG could continue to trade higher until refineries come back online.

The Bottom Line

Hurricane Harvey is impacting the energy markets, and gas prices are expected to surge at the pumps. Consequently, this has impacted energy stocks and ETFs, and some traders are looking to stay long in some energy ETFs and ETNs in the wake of Hurricane Harvey.

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