Tuesday, May 10, 2011

Flooding on the Mississippi is putting a Bid under Gasoline Futures - May 10th

Flooding on the Mississippi is putting a Bid under Gasoline Futures
May 10th, 2011

With the exception of silver, gasoline has been the star commodity since last week’s broad commodity selloff, up 7.77 percent since last Thursday.  It is worth noting, that over the same period, heating oil, which is a closely related distillate, has risen only 4.24 percent, and crude oil has rallied only 5.27 percent.  Unlike the other energy products, gasoline is now trading near its recent peak.  The question is why.

Seasonality plays a role.  As I have discussed in recent posts, gasoline tends to get more expensive relative to its related products during the summer months, when people spend more time on the road.  The summer driving season officially kicks off on Memorial Day later this month.  While this is certainly a bullish factor, it does not on its own explain the strength in the gasoline market.  What is more important at the moment is the risk of significant production losses stemming from flooding on the Mississippi River.

Grain traders are already well aware that the flooding along the U.S.’s largest river system, which drains 41 percent of the continental U.S., has been the worst in several decades.  Already, the Army Corps of Engineers have been forced to blow levees further upstream to reduce strain on the river banks.  This has affected agricultural lands in Missouri, and has prevented farmers in many states from planting their crops.  Now however, the flooding looks like it may threaten oil refineries in Louisiana. 

There is now talk of opening the Morganza Floodway to relieve the flood threat between New Orleans and Baton Rouge.  If this happens, at least 2 refineries will be affected.  While this is manageable, if the river rises and there is flooding further downstream, there are 11 refineries with capacity of 2.5 million barrels a day, 13 percent of total U.S. production, which could be affected.  Flooding at the refineries could shut down production for several months, much like after Hurricane Katrina.  This does not appear to be an imminent threat, but until the river crests, which should happen in two weeks, it will remain on the radar of energy traders and may keep a bid under gasoline. 

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