Heating Season Starts With a Whimper for Natural Gas Traders

  • Trader reaction may be the best indicator of winter threat
  • A mid-season wildcard could bring some chills to winter

Halloween arrives this weekend in the U.S. It’s also the time to turn the clocks back an hour, put new batteries in the smoke detector and turn up the thermostat to fight off the coming chill.

Except, this year, you can scratch that last item. On Nov. 1, the day that traditionally marks the beginning to what the industry considers the start of the heating season, temperatures will climb into the 60s across the big northern cities from Chicago to Boston, according to the National Weather Service.

More windows may be opened than thermostats turned up. That’s a big problem for the traders out there who were hoping that a drop in temperatures would help keep natural gas prices above $2 per million British thermal units.

“The traders I am talking to are expecting a mild winter,” said Jason Schenker, president of Prestige Economics LLC in Austin, Texas.

Traders’ expectations for the coming season are growing out of a belief by meteorologists that El Nino will help keep temperatures from falling too much. That lowers the chances of a repeat of the Polar Vortex blasts of years past and record snowfall in Boston last time around.

While some people take stock in the orange bands of a wooly bear caterpillar to predict the weather, a better indicator may be whether natural gas prices, which dipped below $2 briefly this week for the first time in three years, can stay above this threshold.

Mild Winter

That’s because the next five months, which overlap with winter in the U.S., account for more than 50 percent of the natural gas consumed in the country. A total of about 26.7 trillion cubic feet of gas was used in 2014, with more than half of it coming in January, February, March, November and December, according to the Energy Information Administration.

The current three-month outlook from the U.S. Climate Prediction Center calls for an above normal chance that the northern states, including the large population areas of the Northeast, will have a mild winter. The only places that are expected to be cooler are Texas, Louisiana, parts of Oklahoma and New Mexico.

In addition to the forecast, there’s a certain amount of just looking out the window on the part of natural gas traders, Schenker said. “It is nice outside, it seems kind of warm, I don’t need my parka yet.”

Until the chill wind blows snow onto the doorstep, there isn’t a reason to go long on the market. “Industrial demand is softening and weather demand is not there, and on the supply side you have inventories that are in the upper bound of the five-year range,” he said.

Weather Wildcard

The highs in the 60s (more than 15 Celsius) are boosting the outlook for warmer conditions. As of Thursday, Commodity Weather Group LLC was calling for average temperatures in the upper Midwest, as well as the East Coast, to linger 3 degrees Fahrenheit above normal through Monday.

For anyone looking for some weather help in the gas markets, there is one glimmer of hope out there, a wildcard forecasters cannot predict that far in advance known as the North Atlantic Oscillation, or NAO as they like to call it.

The NAO is connected to the Arctic Oscillation. The two are measures of where high and low pressure set up over their respective regions and they can have an impact on winter weather in the U.S. that has the potential to even outdo El Nino.

It works like this: when the Arctic Oscillation turns negative, colder air will drop down into the heart of North America. Usually when that happens, the NAO will also turn negative, and that is like a giant door slamming shut just off the continent to keep all the cold there.

This is why in 2010, when there was a weak El Nino, snowstorms buried Washington, New York and the rest of the Middle Atlantic.

Exactly the kind of development that could end up calming the hearts of energy traders while keeping weather forecasters busy.

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