As Winter 2015/2016 approaches, natural gas traders and investors are looking to the upcoming winter to provide the next direction for the broken-down commodity. Large supply has pushed prices down almost 40% since 2014 as producers have filled storage with almost 40% less rigs.
Without an overly warm summer to drive natural gas demand through increased power demand, an active tropical season to disrupt production, or the significant increase of natural gas to Mexico / Congressional approval to export liquefied natural gas overseas, the supply glut has been reflected in the commodity’s price.
The overarching concern for the upcoming winter is the effects of the strongest El Niño recorded since 1997-1998. The typical impact of an El Niño event for the United States is warmer than normal temperatures in the northern United States, which results in low heating demand and thus less use of natural gas.
But what are the metereologists and long-range forecasters predicting? Can Winter 2015/2016 save natural gas?
Here’s a summary of expert’s long-range weather forecasts for the upcoming winter.
1. WeatherBELL Analytics
WeatherBELL Analytics, a meteorological consulting firm that provides customized weather forecasts, data services, and weather intelligence tools to entities exposed to the weather, is led by Chief Meteorologist Joe Bastardi, a noted meteorologist personality and proponent of using analogs to compare and forecast future long-range weather events.
According to WeatherBELL, El Niño will be a significant influence, but not the only factor. Overall, the firm expects a colder than normal winter in the South and East.
This forecast bodes well for natural gas bulls because of the population density in the east, and some of the largest state consumers of natural gas (e.g., Texas and Louisiana) are obviously in the south.
However, WeatherBELL does caution that the core of winter will be later rather than earlier, stating that December could be very warm with February very cold.
Natural gas traders and investors saw a similar pattern last year with a very warm December. The result was little natural gas demand that contributed to the supply glut. Thus, despite colder temperatures in January and February of 2015, the commodity could never recover in prices due to the supply glut initiated in December.
2. National Weather Service Climate Prediction Center
The December 2015 through February 2016 forecast from the National Weather Service Climate Prediction Center (CPC) shows a similar forecast to WeatherBELL.
The only difference is that the CPC forecast does not show colder temperatures extending into the Northeast as is the case with WeatherBELL.
The core of the colder temperatures is concentrated in the South while the ridging due to the northern branch of the jet stream will create above average temperatures in the upper Midwest and Pacific Northwest.
Of note, California is forecasted to have above average temperatures. California is the second largest state consumer of natural gas behind Texas.
The Weather Channel’s forecast strongly accounts for the El Niño event and notes that a very warm winter is possible, but its meteorologists caution that there is some risk of big blocking this winter “driven either by a premature weakening and westward shift (towards the dateline) of the El Niño impacts or by just a general tendency for stronger high-latitude blocking.”
At this stage, the Weather Channel is erring on the side of a greater chance of less blocking, leading to a warmer winter.
Similar to WeatherBELL and the Climate Prediction Center, the Weather Channel’s meteorologists are focusing the colder temperatures on the South. Likewise, they predict that the best opportunity for cold conditions in the East will come later in the winter.
4. Weather Services International (WSI)
While WSI will not issue its full winter 2015/2016 forecast until October 20, the firm has given strong indications of its winter outlook. On a whole, WSI expects winter natural gas demand to be 10% lower than last year.
“As we go deeper into fall and early winter, the tropical forcing focused in the eastern equatorial Pacific should drive warmer-than-normal temperatures across much of the northern U.S., as the polar jet stream weakens and lifts northward.”
As seen in WSI’s 3-month forecast from October 2015 to December 2015, the below normal temperatures are focused farther west. This graphic will be updated upon WSI’s October 20 winter outlook release in order to make like comparisons.
5. Farmer’s Almanac
While the Farmer’s Almanac forecast is perhaps less scientific and more of a novelty than to use as a single investment tool, it is a data point that, when taken together with other investment tools and resources, can be considered.
While the forecasts above primarily use temperature anomalies to indicate their winter outlook, the Farmer’s Almanac is less precise by only using descriptive forecast language. Thus, a comparison to other forecasts is simply one’s own interpretation.
However, from this author’s interpretation, the Farmer’s Almanac does differ from the previous forecasts above. Primarily, as seen below, the Farmer’s Almanac is showing colder temperatures in the Northeast as well as the South. The Farmer’s Almanac is consistent with a mild winter in the West and in the Pacific Northwest.
The Bottom Line
Natural gas is ready for its next direction in price. Since April 2015, the commodity has traded in a relative channel between $2.50 and $3.00 per mmBtu.
The effects of a strong El Niño or a late start to winter could send prices to new lows. Alternatively, an early start to winter coupled with below average temperatures in top consuming natural gas states in the South and Northeast could spike heating and thus natural gas demand, sending prices above the coveted $3.00 mark.
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