Looking in the rearview mirror at last winter, one might use the words “warm”, “wet”, or even “what winter” to describe how the season unfolded. One of the strongest El Niño events on record occurred and played a major role in shaping winter weather patterns.
El Niño is characterized by above-normal sea-surface temperatures in the eastern tropical Pacific Ocean, and its impact to weather patterns are similar to what actually occurred this last winter. The impact to natural gas heating demand was dramatic. Oversupply conditions drove wholesale natural gas prices to their lowest level in almost 17 years while wholesale electricity prices also tumbled. However, changes in weather conditions and energy supply prices may be on the horizon.
The current El Niño event has been weakening, as winter and sea-surface temperatures in the eastern tropical Pacific are trending to a neutral/below-normal state. NOAA’s latest forecast shows a 75% chance of developing La Niña conditions (characterized by below-normal sea surface temperatures) prior to next winter. Over the last 65 years, all La Niña events occurred within 2 years of an El Niño event, and out of the last 14 La Niña events, 9 occurred directly following El Niño. So what kind of changes could be in store?
The typical La Niña wintertime weather pattern across the U.S. features colder-than-normal temperatures across the Northwest, Upper Midwest, and Northeast. Meanwhile, drier and warmer conditions often present themselves along the southern tier of the nation. Granted, there are several other factors that influence weather patterns and the severity of winter, but the likelihood is growing that the upcoming winter is going to be colder, which raises the need for heating homes and businesses. With wholesale natural gas prices hovering around 2012’s lows, higher demand and lower supply has the potential to push prices back into a more market-balanced range between $3.00 and $4.00 per MMBtu. That would represent a 20%-60% increase from today’s natural gas prices. Additionally with wholesale electric prices strongly correlating to natural gas prices, similar impacts to power supply costs could be possible.
Although a lot of uncertainty remains about whether a La Niña event will occur or how strong one may be, it’s reasonable to say energy market prices are trending higher from the lows established earlier this year. As natural gas supply and demand begins to rebalance, a colder La Niña-inspired winter could hasten that process and bring higher energy prices sooner as a result.