When and how do tropical storms affect markets? The case of refined petroleum

Abstract

Little is known about the magnitude of the effect of powerful tropical storms on asset prices, or when markets revise price expectations in response to such storms. Refinery clustering in the coastal northwest Gulf of Mexico provides an opportunity to examine such effects directly. We examine the effect of tropical storm forecasts on the crack spread — the difference between refined petroleum and crude oil prices. Prices appear to reflect storm effects at the 24-h forecast horizon. Further, the magnitude is significant — category 4 hurricanes in this region increase refined petroleum prices relative to crude oil by about 13.5%.