Energy investors have been cheered by the continuing wave of colder than normal weather that descended on the United States from Canada beginning during Christmas week. While these investors were happy to see citizens struggling to dig out their vehicles from snow drifts and experience driving tie-ups due to snow, ice and cold, they really didn't care about the impact on holiday shopping caused by the storms. The cold contributed to large inventory drawdowns for both petroleum and natural gas and were greeted with glee! We really are having a winter!
Energy investors were happy to see citizens struggling to dig out their vehicles from snow drifts and experience driving tie-ups due to snow, ice and cold
As readers may remember when we wrote earlier last fall about the contradictory outlooks for this winter's weather -- either the coldest in the past 10 years or a near-normal winter with certain areas actually experiencing warmer-than-normal temperatures -- we said whichever scenario unfolded would impact commodity prices. Now we are starting to see more of a consensus form that the nation will experience a colder than normal winter with increased demand for natural gas and heating oil.
The weather event that seems to be in control of our winter temperatures and precipitation is El Niño in the South Pacific. Right before Christmas, Todd Crawford, the seasonal weather forecaster for WSI Corporation, a member of The Weather Channel Companies, was quoted as saying, "The combination of the current El Niño event, cold north Pacific, and weakened stratospheric vortex are favorable for a continuation of widespread below-normal temperatures across the U.S. for the upcoming season."
"We are forecasting 2,475 gasweighted heating degree days during the January-March period, approximately 2.5% more than last year and about 2% more than the 1971-2000 mean"
He cautioned, however, that, "There may be a relaxation of the current cold pattern in the Northeast during January, followed by a return to more consistent cold in February and March. We are forecasting 2,475 gas-weighted heating degree days during the January-March period, approximately 2.5% more than last year and about 2% more than the 1971-2000 mean."
In early fall, there were conflicting views of what would happen to the then El Niño phenomenon that had been helping to moderate the Atlantic Basin hurricane season making it one of the more benign in recent years. AccuWeather's Chief Meteorologist and Expert Long Range Forecaster Joe Bastardi called for a weakening El Niño that would produce a stormier and colder winter in the southern and eastern regions of the United States. In fact, Mr. Bastardi suggested this winter could be the coldest and stormiest in many years. The energy commodity bulls were roaring with approval.
On the other side of the coin was the Mike Halpert, deputy director of the Climate Prediction Center (CPC), a division of the National
Joe Bastardi called for a weakening El Niño that would produce a stormier and colder winter in the southern and eastern regions of the United States
Weather Service, who said, "We expect El Niño to strengthen and persist through the winter months…" Based on this scenario, the CPC was forecasting warmer than average temperatures across much of the western and central United States. They thought we should see below-average temperatures across the Southeast region and extending into the mid-Atlantic region as far north as Pennsylvania. They expected above-average precipitation in the southern border states, especially Texas and Florida. They anticipated that the Pacific Northwest and Ohio and Tennessee River Valleys would experience drier-than-average conditions. For energy investors, the major population centers in the Northeast were thought to have equal chances of above-, near- or below-normal temperatures and precipitation.
We began to wonder about the forecasts when Pennsylvania experienced one of the earliest snowstorms on record in October. We wondered whether that was a precursor of a colder and stormier winter, or merely an early winter event signifying nothing but a forecasting data point. Since then we have seen several storms sweep across the country from the Plains states to the Northeast including the recent coastal blizzard that buried Washington, D.C. and Philadelphia before dusting up New York City and Boston.
As it appears that the fate of El Niño will dictate what happens during the balance of this winter it is interesting to see the frustration meteorologists are having with understanding the pattern of the current phenomenon and its impact on the balance of the winter. Matt Rogers of the Commodity Weather Group has been focused on a possible warming thaw sometime in January. Last fall he had been looking at analog years with El Niño events as a predictor for this winter. He focused on 2002. El Niño has grown stronger in recent weeks; we have seen sea surface temperatures (SST) soar by more than one degree Celsius. This warming trend has had Mr. Rogers re-examining analog years. This time he focused on 2002 and 1987, years when El Niño peaked early in the winter, which produced a cold-prevailing winter.
As it appears that the fate of El Niño will dictate what happens during the balance of this winter it is interesting to see the frustration meteorologists are having with understanding the pattern of the current phenomenon and its impact on the balance of the winter
As Mr. Rogers examined El Niño he found that the temperature anomalies were occurring further west than the ones in the analog years. This meant that the weather phenomenon was actually further from North America than most other El Niños in the past. This development sent him back to the 2002 and 1987 analogs in which El Niño peaked early. He now believes that the current El Niño will begin to weaken by early January, but as he admits, we have been surprised before by the weather trends of 2009.
As support for his view of an early peaking in El Niño, he points to 2009 being the warmest NINO 4 on record. NINO 4 represents the far western region of the Pacific Ocean where SSTs are measured. As shown by the chart in Exhibit 16, 2009 was slightly warmer than either 2002 or 1987, the target analog years. Mr. Rogers believes that this early peaking in El Niño may help explain why we are getting a stronger-than-expected warming response. But when Mr. Rogers examined a compilation of forecasts by weather models for El Niño, the majority of them are predicting a fading trend. Therefore, the consensus of these forecasters calls for a better chance for colder-than-normal conditions in the United States in the second half of this winter.
Earlier when Mr. Rogers looked at the history of weather conditions back to 1950 that combined a cold December and a warm El Niño, the winter of 1963 stood out. That year had one of the coldest Decembers, which was married with a moderate El Niño. The history of that winter season was a very cold December, a warm January and a cold February. Overall that winter period was colder than normal, but it was achieved in a very choppy manner. Could that be what happens this winter? If so, it will certainly frustrate commodity forecasters but likely make commodity traders happy as they love volatility and shifting outlooks.
G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.
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