Recently, ImpactWeather, a Houston-based weather forecasting and consulting firm, held a webinar in which they discussed their view of the weather trends that will impact temperatures and precipitation in the United States during both the next 30 days and the winter period of December through February. The bottom line is that the developing La Niña in the South Pacific Ocean is controlling the weather patterns. So far the pattern has allowed an active hurricane season to develop but has contributed to only a few of the storms entering the Gulf of Mexico and making landfall on the U.S. coast.
ImpactWeather showed a chart that contained the various global sea surface temperature (SST) anomalies that are influencing global weather patterns. ENSO (El Niño/La Niña Southern Oscillation) is probably the most prominent SST anomaly, but the Pacific Decadal Oscillation (PDO) Pattern, the Atlantic Multi-decadal Oscillation (AMO) Pattern and the Indian Ocean Dipole (IOD) Pattern are also strong weather influencing factors. As shown in the accompanying chart (Exhibit 3), ENSO and PDO are in their cold phase while the AMO and IOD are in their warm phase.
Exhibit 4. La Niña Dominates Winter Weather
The impact of the PDO and La Niña phases is best shown by the forecasts showing the deviation in temperatures that can be expected in the future as a result of these patterns. As shown in Exhibit 5, the 2011-2012 winter forecast shows that temperatures should average between 1°C and 1.4°C below normal. The forecast for November called for a 1.4°C lower temperature range, which would seem to be consistent with the cooling that has been experienced since late October. The chart shows a multitude of temperature forecasts generated by computer models, virtually all of them showing negative deviations. If one compares the forecasted temperatures for this winter with the temperatures experienced last winter (the far left side of the chart), they look similar, but the forecasted temperature anomalies don't show the move back to zero as experienced last summer. That would suggest that in the United States we may not experience the extreme heat witnessed last summer. That doesn't mean that the drought conditions will end, but lower temperatures would be a welcome relief.
Exhibit 5. Cold Winter But Cooler Summer?
The dominant weather influencing patterns for the upcoming winter include a large, strong low pressure mass covering western Canada and the Pacific Northwest and Mountain states, which will bring arctic air to the region and push the jet stream and colder temperatures lower than normal and across the middle of the United States this winter. At the same time, there will be a large high pressure mass over the tip of New England and the eastern provinces of Canada that has the impact of directing the jet stream virtually straight north into the Arctic region. We suspect that jet stream pattern could help lead to less ice being formed in the Arctic Ocean region this winter that would allow the opening up of an ice-free ocean route to Asia.
Exhibit 6. Weather Patterns Much Like Last Winter
For those of us living and working in the oil patch across Texas, Oklahoma and the Southeast states, the winter weather is expected to be drier than normal and slightly warmer than normal. This pattern is best demonstrated by the charts in Exhibits 7 and 8 on the next page.
In Exhibit 7, we have the expected temperature deviations from normal for North America. The chart shows that western Canada should be -2°F to -4°F colder than normal. The expected temperature trend anticipated for Alaska and across the very northern region of Canada calls for deviation trend nearly twice that of the rest of the region. A large portion of the United States and a small strip of eastern and central Canada are expected to see normal temperatures this winter. The Southwest and Southeast states should see winter temperatures between 1°F to 3°F warmer than normal.
Exhibit 7. 2011-12 Winter Temps To Be Colder
The winter outlook for precipitation calls for most of North America to experience normal wet weather with only some small pockets of above normal precipitation. The coastal region extending from north eastern Mexico around the Texas Gulf Coast and through the Southeast states and up to the Mid-Atlantic states should experience less moisture than normal.
Exhibit 8. Winter Precipitation To Be About Normal
We found one of the last charts prepared by ImpactWeather for its presentation very interesting. The chart showed a range of potential hazards that could be experienced by regions of North America this coming winter. The hazards show where there could be greater than expected snowfall, greater rainfall, hard freezes and lower than normal snowfalls. It will be interesting to watch the winter weather develop and especially how the media covers any of the extreme weather events that might occur. Given the large number of potential weather hazards ImpactWeather foresees, there should be no shortage of extreme weather events for the media to report on.
Exhibit 9. Plenty Of Winter Hazards Exist
What could another cold winter mean for the natural gas market and gas prices? We went back and looked at natural gas storage volumes over the past two winters compared to where we are today. It is interesting to compare where storage volumes were at the end of the first week of November for each of the three years – 2009, 2010 and 2011. This year there was 3,831 billion cubic feet (Bcf) in storage compared to 3,840 Bcf in 2010 and 3,813 Bcf in 2009. The first week in November 2010 was the peak for that winter, but the peak in 2009 was not reached for an additional three weeks as the total storage volume reached 3,837 Bcf. This year the second week in November, which is the latest data available, showed storage volumes had increased from the first week to 3,850 Bcf, now in excess of the peak storage volume registered in 2010.
We decided to look at what happened to natural gas prices as gas volumes expanded and contracted. Prices have been, and continue to be, influenced by the growth of shale gas production. Before we looked at the comparison, we plotted weekly spot natural gas prices versus the futures price in order to see exactly how they compared from 2009 to 2011. As shown in Exhibit 10, the two prices moved together for most of the period with the exception of the fall of 2009 and briefly again in late fall of 2010. It is interesting to note that in the past several weeks the two prices appear to be diverging once again. The fact that the divergence in prices coincides with the late fall time frame suggests that spot prices are more sensitive to temperature variations, i.e., short–term supply and demand factors at work, than are futures prices. This is the impact of physical versus financial factors.
Exhibit 10. Spot And Futures Gas Prices Track Closely
Exhibit 11. Shale Gas Production Is Keeping Gas Prices Down
When we examined the seasonal swings in gas storage volumes with spot natural gas prices it was quite striking to note the dramatically different pattern experienced in 2009 compared to 2010 and so far in 2011. In 2009, as gas storage volumes were climbing, natural gas spot prices were falling. Once winter demand set in and gas storage volumes began being withdrawn at a rapid rate due to the early cold weather, natural gas prices responded by rising sharply. The winter of 2009 was colder than the prior several winters that were unseasonably warm. Commodity market expectations were that the early cold temperatures might signal an extraordinarily cold winter that would deplete gas supplies and impact gas supply availability. As a result, the gas market assigned a large premium to near-term gas supply volumes, hence the sharp jump in spot gas prices.
In contrast, the 2010 winter, which was also a cold winter, did not experience the sharp upward move in natural gas spot prices in response to falling storage volumes because shale gas production was rising sharply and helping to meet the increased demand. As a result, the natural gas market anticipated there was little chance of a supply crisis even with a colder than normal winter so there was little need to bid spot prices up to bring forth more supply and reduce demand.
The current downward spot price trend compared to the new peak storage volumes suggests the gas market anticipates another winter season like last year. The growing shale gas production, coupled with continued strong gas-related drilling activity – both for dry gas and associated gas from liquids-rich prospects, is being translated into lower spot prices. This pattern suggests that unless the winter of 2011-2012 is much colder (not the current weather forecast) than last year, we are likely to be looking at continued low spot gas prices. If gas-directed drilling begins to fall, maybe by sometime next fall we could see sharply higher spot gas prices. Pray for a colder winter if you want to see higher natural gas prices, but until producers become more religious about the economics of their gas drilling spending, it will be hard for gas prices to rise to levels everyone is counting on.
G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.
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