How do storms blow through markets?

Unless you happened to be present at the Florida beach where Hurricane Debby washed up over $1 million worth of cocaine, you probably don’t often think about the impact tropical storms have on your finances.

But as extreme weather grows in severity and frequency, it can be helpful to understand the effect hurricanes have on the economy—and your portfolio.

Like many natural disasters, hurricanes are only getting worse over time due to the effects of climate change. This year is poised to be an especially severe season for Atlantic storms, given a combination of increased heat from the El Niño weather pattern along with the high probability of a La Niña event, which inversely cools ocean surface temperatures. We’ve already seen the earliest Category 5 hurricane this summer (Hurricane Beryl), an ominous bellwether for the rest of the year.

How do superstorms strike your portfolio? Deutsche Bank research analyst Cassidy Ainsworth-Grace recently explained what sectors and commodities are affected by these weather events.

• Hurricanes put upward pressure on oil prices, due to the damage they cause to refineries around the US Gulf Coast. “A temporary loss of monthly offshore crude production of 1.5 million barrels per day, and an equivalent loss of refinery capacity, could increase monthly average US retail gasoline prices by an estimated between 25 cents per gallon and 30 cents per gallon,” wrote Ainsworth-Grace.
• Higher oil prices tend to make agricultural stocks more expensive, too. The price of fertilizers coincides with oil and natural gas prices, meaning that when oil and natural gas face upward pressure, agricultural investments tend to follow. “General disruption to agricultural production in the US, Europe, China, India, and South America due to La Niña weather patterns and the resulting above-normal storm activity would also add to upside price pressures for crops,” wrote Ainsworth-Grace.
• The effects of supply chain disruptions span continents. A disruption in US natural gas would have a direct effect on European access to fuel, given that European nations have been reliant on American oil since Russia’s invasion of Ukraine. In addition, severe weather events directly impact South American commodity production for soybeans, corn, and more.

The takeaway? Natural disasters tend to have a domino effect on the economy. Staying well diversified across commodities and stocks can be a useful way to stay invested through the highs and lows.—LB