Weather Forecast Favors a Colder Winter

Hedge

By Dan Lothrop, Northland Energy Trading, LLC

The 2015-2016 heating season was very mild. Weekly heating degree days (HDDs) from the National Oceanic and Atmospheric Administration’s (NOAA) Climate Prediction Center (CPC) totaled just 6,313 for the September through April period in the Northeast region (on an oil home heating customer weighted basis) and 4,793 HDDs in the Mid-Atlantic region.

These were 16.5 percent and 15.7 percent below the 1981-2010 norm. Last winter was characterized by a very strong El Niño weather phenomenon—one of the three strongest on record according to NOAA—leading to weaker heating demand, holding other factors constant.

Thankfully, El Niño conditions are not expected this winter. Back in May, the CPC saw a 75 percent chance that La Niña conditions would develop this fall and winter. Since then, the CPC downgraded the apparent likelihood for La Niña conditions and, as of September 8, saw El Niño Southern Oscillation (ENSO) neutral conditions as most likely.

You have likely heard these terms in the news, but what exactly do they mean? And what is the potential impact to demand from your customers under different conditions?

El Niño conditions are characterized by a weakness in the equatorial trade winds. Because warm water rises, westward-blowing winds at the surface usually push this warm water away from the Pacific coast of South America and toward Southeast Asia. Under El Niño conditions, this doesn’t happen, and so the warm water shifts back toward South and Central America, bringing with it rainfall and the chance of flooding. According to NOAA, over 80 percent of the El Niño events have seen wetter-than-average conditions along the Gulf Coast from Texas to Florida during the October through March period as well.

The phenomenon tends to push the polar jet stream north, and so for the northern half of the United States, El Niño events tend to bring warmer temperatures relative to the 1971-2000 long-term average from November through March.

La Niña Is a Different Animal
La Niña is the opposite of El Niño. It occurs when strong trade winds push warm surface waters towards Asia, cooling the central and east-central equatorial Pacific Ocean. This generally means heavier rains in Southeast Asia and dryer conditions in lower latitudes of the Americas. The polar jet stream shifts southward, bringing colder temperatures to the western part of the country and to the northern states for the November through March period, relative to the 1971-2000 average.

Another feature is an increased likelihood of an active Atlantic hurricane season, reflected in the forecasts we saw issued this summer. With the CPC granting a 55 to 60 percent chance of ENSO-Neutral conditions during the Northern Hemisphere fall and winter 2016-2017 as of September 8, we can anticipate a colder winter than last year. If the Arctic oscillation (AO) shifts into a negative phase, featuring weak westerlies (upper level winds), we could see the additional benefit of cold Arctic air reaching more southerly latitudes.

East Coast distillate inventories were in very good shape heading into the heating season. The Energy Information Administration (EIA) showed stockpiles in the region at 66.06 million barrels (mb) as of the September 23 reporting week: 11.47mb higher than the same week last year and 25.58mb higher than the five-year average.

Reflective of the tightening sulfur content specifications in the Northeast, combined low- and ultra-low sulfur distillate stockpiles in region, at 52.42mb, accounted for 7.03mb of the yearly stock overhang. Consequently, ULSD and low-sulfur markets were in good shape to weather potential supply disruptions or extended periods of cold weather, particularly near pipeline routes, reducing the chances (all else equal) of a basis blowout this winter (a jump in cash prices relative to the front-month NYMEX ULSD [HO] futures price). This also means suppliers are more likely to be able to provide favorable differentials in the price offers.

The information provided in this article is general market commentary provided solely for educational and informational purposes. The information was obtained from sources believed to be reliable, but we do not guarantee its accuracy. No statement within the update should be construed as a recommendation, solicitation or offer to buy or sell any futures or options on futures or to otherwise provide investment advice. Any use of the information provided in this update is at your own risk.

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