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42 comments on Hurricane Katrina Update: The Event that Introduces Peak Oil to a Nation

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Halfin on August 27, 2005 - 11:51am

It's ironic that oil futures plummeted on Friday, the last day of trading, apparently after the weather service updated the forecast and it seemed to show that Kat would miss the oil areas. You can still see the chart on the right of the Oil Drum home page, the price dropped like a rock when the forecast came out. Now the more recent updates suggest potentially serious problems, but the markets are closed. I don't doubt that speculators would send the price up to near $70 based on just the chance of problems, if there were trading today. It will be interesting to see what happens when the markets reopen.

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mw on August 27, 2005 - 12:18pm

That sell off was in part due to lower Friday volume as well - stop runs are common place (in both directions) when markets thin out. "Fading" (taking a trade opposite) stop runs - moves that take on a life of their own with little rationale underlying - can be a profitable strategy for the nimble... its important to exit quickly when wrong.

I was a little surprised the move gained as much steam as it did, but I wasn't surprised to see a late Friday pm sell off following sideways price action and a big move up overall for the week. Both Natural Gas and Crude are effectively testing the top of contract highs; such tests are always points at which experienced traders go on high alert for signs of any reversal and this can cause sharp moves in either direction.

http://www.trendvue.com/charts/2005/08/tv20050826-25.gif
CL / NG intraday Friday

Its very common to see a late PM sell off (doesn't matter whether its oil or stocks or cotton or whatever) when price has acted strongly and then churned sideways. Longs with profits get more and more nervous as the chop continues - once the first dip out of the range failed to hold, a cascade of stops gets triggered.

Most of this price action is reflective of the moments in time then and there, not so much on big picture considerations.

What really surprised me was that so few stepped in to buy; common sense says the storm risk level at that point was higher than it is today, because risk was still largely unquantified. That far out, particularly since there wasn't any movement northward as yet, and the track still was pointing in the wrong direction, suggested to this trader that the track was still subject to significant revisions. Indeed the forecaster commentary supported this view too.

Therefore 45 minutes before the close on Friday was not the time to make firm decisions as to storm direction and risk.

Giving some traders the benefit of doubt, at the time the track and timeline suggested there would be an opportunity to buy back in before landfall, and the forecast seemed too far east to be a huge concern so some may have stood aside as a result believing they could add to positions on Sunday night in the electronic market or on London.

Given the current picture playing out, price is now more likely to gap up and leave em behind which may cause a little panic buying before the regular open of crude in London and then Nymex Monday am.

In the end I did some buying in the oil and gas sector (only companies with no GOM exposure) and added to my futures positions (short) in the broader market.

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