Saturday, September 20, 2014

Winter 2014/2015 Temperatures - A Wild Card in Natural Gas Prices

Natural gas prices at the mercy of mother nature
Those that follow the natural gas prices in the U.S. know well the impact of a colder than average winter like what we experienced in the winter of 2013/2014. Hedges help to mitigate swings in natural gas spot prices, but storage deficits and draw will eventually hit when contracts expire, and no one can escape a sustained price swing for long. The 2013/2014 winter shocked natural gas storage and set many records. By the end of March, storage levels reached a 10-year low. And February saw the largest natural gas demand ever. Storage recovery still lags, but thanks to the Marcellus Shale, Utica Shale, and others, we are almost there, and just in time with winter around the corner. The chart below from the U.S. EIA illustrates a few things worth noting.

1) As the last two years shows, demand starts to outstrip supply in mid to late October, when storage starts to take a hit. Then, after sustaining us through the winter (or just barely so in early 2014),  a build up begins in preparation for the next winter. It does not take much imagination to appreciate that this is a delicate balance.
2) The winter of 2014/2015 saw a huge dip in storage, though a simple line projection puts us back where we need to be (for an average fall and winter) at about the same time the seasonal draw in storage is set to begin.

Source: U.S. EIA

U.S. natural gas price history and average temperature correlation
As pointed out, natural gas prices are driven in part by storage reports (or in their anticipation due to cold weather forecasts or other factors).  Last winter's huge draw on storage created some large price spikes as seen in the graph below.

Source: U.S. EIA

And while many remember the winter of 2013/2014 as bitterly cold, overall, when looking at the 48 contiguous states the departure was only one degree below normal (source: NOAA), though where it was colder mattered, with larger populations impacted. In Illinois the average temperature departure for February was -9.7 degrees F (source: NOAA). Other departures for February 2014 included New York (-1.9 deg F.), Pennsylvania (-3.7 deg F.), Ohio (-5.7 deg F), and Michigan (-6.4 deg F.).

A lesson in predictions from the winter of 2013/2014
Scientists often struggle to forecast  the weather from one day to the next, and longer range forecasts in the 7-10 day range can be simply awful. I remember reading from some forecasters back in October and November of 2013 that the 2013/2014 winter in the Midwest and Northeast were going to be anywhere from average to a bit warmer than normal, and then... it was one of the coldest on record in many parts of the country! And of course they had to come up with some "excuse" for why they got it so wrong. A name did the trick, it was all the fault of the "polar vortex". When forecasters get it wrong there is always an excuse, from polar vortex to a dip in the jet stream to  an unexpected weakening of El Nino. But all of this does not hide the fact that they missed it. The fancy name or scientific jargon for why the scientists missed it does not change the fact.

Predictions for Winter 2014/2015
Some are saying that the winter of 2014/2015 will be extremely cold and similar though not quite as severe as last winter. Others are saying that it will be about normal "unless" a polar vortex or two sets up. "Unless a polar vortex or two sets up"?, that's like saying we are going to see average temps this winter unless we see colder temps this winter. Wow, what a prediction, hard to miss that one.

One common way of predicting is by looking at what is happening now, "Hey, we are seeing some of the earliest snowfalls on record in some cities, maybe this means that it will be a colder than normal winter." And we are seeing early snowfall and early cold weather in many parts of the U.S., so maybe we will see a cold winter. I would bet on a colder winter based of the early cold weather and snow, but some might call that too simplistic of an explanation because I did not use the word jet stream, vortex, or Nino in my explanation.

A word to the wise, don't mess with Mother Nature (or think that you can predict her with any certainty I would add).