From El Niño to La Niña: Natural Gas and Hurricane Potential

From El Niño to La Niña: Natural Gas and Hurricane Potential

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

El Niño 2015 is long gone. Now, there is high potential that La Niña 2017 is forming. The impacts of these weather events can be very far reaching. El Niño 2015 led to less rain in the monsoon seasons of India, Malaysia and Indonesia, and the ensuing drought conditions created more wildfires. In Brazil, El Niño 2015 eased drought conditions and water shortages around São Paulo. Going against historical patterns, the storm’s track in North America failed to move southward, so southern California did not get as much rain as hoped for; the Pacific Northwest experienced storm after storm; and the U.S. Midwest winter was warmer than predicted.

In Science magazine (24 June 2016, Volume 352, Issue 6293), Eli Kintisch analyzed what factors contributed to not all the forecasts working as planned, especially the failure of the North American storm track to move further south. The key to how winds above North America are impacted depends on the “southern oscillation.” In 2015, the Pacific Ocean off the coast of North America was much warmer than in the previous strong El Niños of 1982 and 1997, and the warmer northern Pacific is getting credit for keeping the storm track from moving south.

Now that El Niño has departed, weather analysts are observing the potential (current probabilities are in the 60% to 70% range) for La Niña to form, which means colder-than-usual waters along the equatorial Pacific Ocean. A flip from El Niño (the boy) to La Niña (the girl)  is typical, especially when an El Niño was quite strong, as occurred in 2015.

Figure 1: August 2015 – Strong El Niño

1. Putnam, B., 2016, “From El Niño to La Niña: Implications for Natural Gas, Agricultural Price Volatility, and the Potential for Hurricanes,” Research Council Corner: The Economist’s Edge, Global Commodities Applied Research Digest, a publication of the J.P. Morgan Center for Commodities at the University of Colorado Denver Business School,, Vol. 1, No. 2, (Forthcoming) Fall.

Figure 2: August 2016 – La Niña Forming?

Blue indicates colder-than-usual sea surface temperatures. La Niña is colder waters along the east equatorial Pacific Ocean.

Focus on Natural Gas in North America

With La Niña 1998-99 came a very cold winter that helped to deplete natural gas supplies in the United States, and eventually, with a lag, lead to sharply higher natural gas prices. This time around could be different, depending on whether the sea temperatures in the Pacific Ocean off the coast of North America cool down and reinforce a La Niña as they did in 1999 and also in 2007 or if they could stay warmer than usual and partly counteract a strong La Niña.

We know, however, that there have been other changes in the natural gas market since 1999. First, there is much more natural gas production in the U.S. In 2015, U.S. natural gas production was 42% higher than in 2000. The boom really got into high gear after 2006 and has not looked  back. Second, much more U.S. electricity production has shifted to natural gas from coal. Indeed, natural gas as a source of electrical power generation will most probably surpass coal for the first time in 2016. The implication of more power generation from natural gas is that if there is an exceptionally cold winter, the additional demands on the electricity power grid may help to work off natural gas inventories faster than the last La Niña. The implication, due to vastly expanded natural gas production, is that  the upside potential for price movement is not as great as in 2000-2002. Still, natural gas prices are likely to see considerable volatility and a rapid reaction to a shift from El Niño to La Niña, if it happens.

Figure 3: US Electrical Generation Energy Sources – Coal versus Natural

Figure 4: US Natural Gas Production

Agricultural Price Volatility

 The potential for agricultural price volatility rises with a shift from El Niño to La Niña. More rain comes to India and Indonesia, as well as Australia and Africa, while drought potential rises in Peru, Chile, and the U.S. southwest. For now, the U.S. corn-belt is in very good shape regarding moisture.

Hurricanes and Cyclones, Too

 Finally, we note that there could be economic disruptions in the U.S. and China due to storms. If it comes about, La Niña 2017 would likely be associated with the potential for many more hurricanes or cyclones to form and make landfall, which could impact both the U.S. east coast and the Chinese east coast.