This is an extract from a Hemscott Investment Analysis newsletter which just
hit my mailbox..............................................
Katrina has done her worst, and pretty bad it was, too. Fears that the
hurricane's devastation would be dire prevailed on Monday, then hopes rose
that it was not too bad after all on Tuesday only to be dashed again as
conjecture gave way to reality on Wednesday.
The timing of the big blow had a certain edge to it. Only a week ago Lloyd's
of London insurers were producing better first half figures than expected
but they did warn that it could all change in the second half because the
hurricane season was not yet upon us. It is now.
Katrina, which hit Louisiana and Mississippi particularly badly and shut
down oil production and refining in the Gulf of Mexico and south eastern
USA, caused damage provisionally estimated at $10-25bn. That is a wide
margin, but the trouble with this kind of disaster is that the bills come
trickling through for up to three years afterwards so immediate estimates
are inevitably rough and ready reactions.
This could, therefore, be the most expensive hurricane yet, beating Andrew
which picked the same target area in 1992 and cost the insurance companies
over $20bn. Katrina's bill is likely to be in the centre of the estimated
range, that is $15-20bn, although not all losses will have been insured.
Wild estimates of up to $50bn have already been dismissed.
It is likely that all Lloyd's insurers will be picking up their share of the
bill, as property and offshore energy risks are popular lines in London,
though it will take a while for first estimates to come through. The good
news is that they can stand the losses though their shares inevitably
wobbled this week.
One Lloyd's insurer, Bermuda-based Alea, has wasted no time in setting aside
extra reserves. It has tucked away £34.7m on top of the £72.5m set aside
last year.
On the whole, though, there is no need to worry unless there are more
Katrina's on the way. Insurance does not eliminate risk, it shifts the risk
from the insured to the insurer and hence to the insurer's shareholders. The
reinsurance industry as a whole has been more disciplined and premiums have
held up well in the good times in order to cover the bad times. Even so, a
series of disasters will not only destroy profits but eat into reserves.
The big trouble with hurricanes are that they are so unpredictable. The only
certainty is that they build in ferocity over the sea and burn out
relatively swiftly over land but the track they take can veer suddenly. If
they hit the Caribbean islands or Florida, much of the sting can be taken
out of them before they sweep through the Gulf. It is also a matter of luck
whether highly populated areas get hit rather than sparsely populated ones,
though the growth in the world's population is gradually shifting the
equation.
On the other hand, three serious hurricanes ran up a total of $23bn last
year. Lloyd's was landed with a £1.3bn hit, which effectively halved the
exchange's combined profits. Katrina has arrived earlier than the normal
start of the hurricane season so we must hope that it is not an ill omen.
The other obvious effect of the hurricane has been to push crude oil prices
to new highs above $70 a barrel. This has brought a suggestion from Kuwait
that Opec should step up its quotas by 500,000 barrels a day (though Opec
members are already running about 210,000 barrels over their allotted
targets so this might not amount to more than 300,000 barrels) and Saudi
Arabia, traditionally the 'swing' producer that can step up production or
turn it down to balance out supply and demand, has offered to chip in 1.5m
barrels.
This will help to make up for the temporary loss of 1.4bn barrels a day of
crude production in the Gulf but it will not solve the other, more pressing
short-term problem, the immediate need for refining capacity. At the peak of
the hurricane eight oil refineries in Louisiana were closed, about 10% of
the USA's refining capacity, and it is not yet known how much damage has
been suffered.
In a curious sort of way, all this could eventually drive oil prices lower,
especially if enough energy consumers, especially the America gas guzzlers
who have had petrol on the cheap for too long, learn their lesson and cut
back. As refining capacity gets back to normal, there could be an abundance
of crude available for a change.
Billionaire business publisher Steve Forbes is reported to be taking this
line. He reckons that oil will fall to $35-40 a barrel within 12 months as
the bubble bursts. That seems a little too optimistic. The worrying point
about the oil price is that it goes up to a new high, falls back a little
without losing all of the latest gains, then surges again to another peak on
the next bit of bad news.
Not so long ago we would have been delighted to see crude stabilise below
$60 a barrel, and only weeks before that at less than $50. Now we will heave
a sigh of relief if it settles back below $70.
http://www.hemscott.com/
© Hemscott Investment Analysis Limited
----- Original Message -----
From: "R. Jackson" <jackson.robert.r@xxxxxxxxxxx>
To: <olympus@xxxxxxxxxx>
Sent: Thursday, September 01, 2005 9:56 PM
Subject: [OM] Re: [OT] Re: Getting gassed - a rant.
>
> Ah, the old odd/even days of the Arab Oil Embargo. I remember dad
> looking at his 500 cubic inch Eldorado engine in a whole new light. ;-)
>
> On Sep 1, 2005, at 1:52 PM, <bs.pearce@xxxxxxx> <bs.pearce@xxxxxxx>
> wrote:
>
> > Although I consider previous changes in price to be related more to
> > greed
> > than other issues, this crisis is real. There are a great
> > percentage of
> > refineries located in storm damaged areas. Supplies will be short.
> >
> > I predict rationing.
> >
> > Bill Pearce
> >
>
>
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