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Hurricane Playbook

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If Dean were to veer north a few degrees and miss the Yucatan, it could end up as a strong Category 4-5 hurricane with a strong possibility of affecting our domestic oil and natural gas supply in the gulf.

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Hurricane season is about to shift into high gear during the next month, but I wanted to take a few minutes to highlight some of the risks going into the weekend with Dean.

Most of the models have Dean tracking south of Jamaica Sunday and crossing the Yucatan Peninsula sometime late Monday or early Tuesday. If this path is correct, Dean will probably make landfall somewhere around the Mexico/U.S. border leaving our oil and natural gas production unharmed. This seems like the most likely scenario based on the current models.

The problem (risk) is that the models have to be spot on for this to happen. Any revisions (error) will be to the north, which puts the Texas Gulf Coast and possibly Louisiana in the line of fire. Unfortunately, a few degrees of error this far out can make the difference between a Brownsville landfall and a Houston landfall. If Dean were to veer north a few degrees and miss the Yucatan, it could end up as a strong Category 4/5 hurricane with a strong possibility of affecting our domestic oil and natural gas supply in the gulf. Even worse, a direct hit on Houston by a Category 4/5 hurricane could disrupt much of the nations refining operations along the Houston ship channel.

While we are still too far out for the models to give me a lot of confidence on where Dean will strike, clarity should begin to emerge over the weekend. Unfortunately, traders will have to make preparations today as we are running out of trading hours before Monday morning. The risk that the models are wrong seems too great to me.

The easiest way to hedge against the risk of Dean affecting production/refining along the gulf coast would be to buy an energy ETF like the OIH or XLE. Other names that could do well are the integrated oils or refiners such as Marathon Oil (MRO) or Valero (VLO). For natural gas, I prefer the producers that drill on land, not in the gulf. Names like Ultra Petroleum (UPL), Southwestern (SWN), and Chesapeake (CHK) would all benefit from any disruption in natural gas supply.

One statistic I found fascinating was that of the previous ten wettest Julys on record in Texas, six had major hurricanes hit the Texas Gulf Coast the same year. Texas had one of the wettest Julys ever this year.
No positions in stocks mentioned.

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