Forecasters around the world are watching the Pacific Ocean for signs of a cooling cycle that could heat up the Atlantic hurricane season, affecting energy and commodities markets.
A La Nina watch was issued earlier this month by the U.S. Climate Prediction Center in Camp Springs, Maryland, and the Australian Bureau of Meteorology will release an update later this week.
The Pacific has just emerged from an El Nino, or sea temperature warming, and seems to be moving directly into a cooling episode. About 35 to 40 percent of all El Ninos are followed by a La Nina, according to the meteorological bureau.
“Things have evolved rapidly enough that conditions are now what we’re terming favorable for the development; it is not a guarantee by any means,” said Mike Halpert, deputy director for the U.S. climate center. “The majority of the computer models do bring us into La Nina.”
La Nina is a cooling of the equatorial Pacific Ocean occurring on average every three to five years and lasting nine to 12 months, according to the National Oceanic and Atmospheric Administration. Some events have lasted as long as two years.
The phenomenon tends to enhance hurricane development in the Atlantic by eliminating high altitude wind shear that tears storms apart, Halpert said. Hurricane forecasts by NOAA and Colorado State University are calling for an active season and noted the development of a La Nina would make the odds of that more likely.
Gulf Strike Possible
An increase in the number of hurricanes boosts the chances that a storm will enter the Gulf of Mexico, home to about 30 percent of U.S. oil and 12 percent of U.S. natural gas production, the Energy Department says. Traders have taken note.
“There is a bit of fear built in when you get these kind of forecasts, whether that is justified or not,” said Cameron Horwitz, an analyst with SunTrust Robinson Humphrey Inc. in Houston.
Forecasts for an active season raise memories of 2005, the busiest and most destructive on record with storms including Katrina, Rita and Wilma, he said.
“People still remember spikes of about 15 percent in gas prices,” Horwitz said. “I don’t know if the fear is warranted.”
Median outcomes for production shut-ins in the Gulf because of hurricanes may be 26 billion barrels of oil and 166 billion cubic feet of natural gas, according to a June U.S. Energy Information Administration simulation.
Debate in Markets
“The hurricane season has certainly been part of the dialogue and the debate in the natural gas market over the last couple of weeks,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “We have seen a number of these forecasts all pointing to a substantially higher risk from hurricanes than last year, and that has been lifting natural gas into a higher range than where we had been trading.”
A La Nina may have a wider affect on the weather than just hurricanes. The cooling patterns often bring dryer, warmer weather to the southern half of the U.S., increasing the wildfire threat in Florida and California. Florida is the second-largest producer of oranges, behind Brazil.
Increased rainfall in southern Africa, northeastern South America and the U.S. Pacific Northwest are also common during La Ninas, Halpert said. The northern third of the U.S. often has colder winters as well, he said.
Venezuela has suspended a national electricity rationing plan that was instituted in January because of a drought, in part caused by El Nino, that threatened to dry up hydroelectric dams and collapse the nation’s power grid.
A cooler winter in the U.S. may drive heating oil and natural gas consumption. Currently, the U.S. has above-average inventories, Evans said.
The indicators “are potentially bullish,” he said. “Whether they ultimately result in substantial tightening of the natural gas market or whether they let us work off our extraordinary stockpile of distillate inventory including heating oil, we will have to wait and see how that goes.”
Commercial oil inventories held by the Organization of the Petroleum Exporting Countries was estimated for the first quarter of 2010 to be 2.7 billion barrels, the U.S. Energy Information Administration reported June 8.