WEAT - Predicting Different Flavors Of El Nino For The Natural Gas Market

2023-10-12 12:38:39 ET

Summary

• El Nino may impact global crop and energy weather in the coming months.
• Mixed signals from El Nino could result in a colder November or a warm December in natural gas regions.
• The MEI index suggests a weak El Nino currently, but if it strengthens, it could lead to a warm Northern Hemisphere winter.

Introduction

There will be major implications for both agricultural and energy commodities based on the fate of El Niño over the next few months. I wanted to share a bit about my weather forecasting techniques in this report. We're diving into the nitty-gritty of El Nino and how it might impact global crop and energy weather in the coming months.

I'm breaking down the least and most likely scenarios for El Nino, considering factors like global atmospheric angular momentum and the positive Indian Dipole. It's like connecting the dots between weather patterns, crops, and energy demand on a global scale.

Here's a brief overview of how weak vs strong El Nino can affect commodity markets during winter in the Northern Hemisphere and summer in the Southern Hemisphere:

Weak El Nino : When Global Angular Momentum (GLAAM is negative)

• Oil and gas ( UNG ) - Possible demand increase due to colder NH winters
• Grains - Mixed impacts on coffee ( JO ), corn ( CORN ), wheat ( WEAT )
• Soft commodities - Some variability but generally limited effects
• Gold - Stable demand, limited price response
• Cotton ( BAL ) - May see slight yield declines in Australia

Strong El Nino: When Global Angular Momentum (GLAAM is positive)

• Oil and gas - Waker demand and prices due to warm NH winters
• Grains - Improved yields in South America, but reduced in Australia and Southern Africa.
• Soft commodities - Drought reduces Robusta but not Arabica coffee. Sugar ( CANE ) production is often reduced (like in Thailand/India this last summer - but that is old news).
• Gold - Rising investment demand as hedge against volatility.
• Cotton - Substantial decreases in Australian cotton and sometimes in India or China production.

State of the Atmosphere: El Nino, positive India Dipole and negative GLAAM

The earth’s atmosphere and oceans have a certain amount of natural rotation or spin, which is called angular momentum. This spin affects weather patterns.

During El Nino events, the trade winds weaken in the tropical Pacific, which normally blows from east to west. This allows the equatorial ocean currents to speed up. The faster-moving ocean currents cause an increase in the earth’s rotation and global angular momentum. Hence, warm ocean waters move further east from near Australia to the eastern Pacific. This means GLAAM is usually positive.

Normally, GLAAM is positive when the trade winds reverse, blowing warm waters (arrow) from west to east. So positive GLAAM is most present during roughly 75% of all El Nino events. Currently, GLAAM is negative , which means less torque or rotation along the equator. This could potentially weaken the warm waters blowing from west to east. If it does, a cold, snowy northern Hemispheric winter would be the rule.

The MEI Index: What is it and how does it reflect El Niño or La Nina conditions?

A positive MEI (Multivariate ENSO Index) indicates the presence of El Nino conditions in the tropical Pacific Ocean. Specifically:

• The MEI indexes the combined signals of multiple atmospheric and oceanic components over the tropical Pacific that show El Nino/La Nina oscillations.
• A positive MEI reflects warmer sea surface temperatures, weakened trade winds, and reduced upwelling in the eastern tropical Pacific – key signs of El Nino.
• The higher the positive MEI value, the stronger the El Nino conditions. A positive MEI over 0.5 represents a moderate El Niño and above 1.0 indicates a strong El Nino.

The higher the MEI value, the stronger the El Nino. N otice the current value of 0.6 (bottom right red star), compared to some of the strongest El Nino events since 1972. This suggests that El Nino is weak currently , even though Australia ( WEAT ) has been in a drought and there have been global El Nino-type weather problems for sugar ( CANE ) growing in India and Thailand. Some of these crop issues are due to other teleconnections such as a positive India Dipole.

This weaker MEI index is one key reason that mid October into November will be colder than normal for the eastern half of the United States and has been a background factor in helping natural gas prices rally.

The MEI index does not just factor in the record warm ocean temperatures currently, but a variety of other criteria such as GLAAM and SOI Index. ( El Nino/Southern Oscillation (ENSO)

Early clues for winter weather based on current weak-moderate El Nino trends ( less likely scenario)

While most of my studies suggest a colder-than-normal November for parts of the Midwest and Northeast (which should keep natural gas prices firm on breaks), this particular study is more unlikely.

Should El Nino weaken (or fails to strengthen), a much colder winter outlook might ensue and have stronger repercussions for the energy ( USO ) markets.

In other words, if GLAAM (Global Angular Momentum) remains negative, and El Nino does not strengthen, winter weather for the natural gas market ( UNG ) could be much colder and/or potentially very volatile. Hence, at least two cold winter months and possibly a warm December. This would create market volatility in natural gas ( BOIL )

What happens in winter if El Nino becomes strong and GLAAM switches to positive? (more likely scenario)

There have been close to 17 moderate to strong El Nino events, a bunch (12) of very weak El Nino events that statistically did not have as much of a global effect on climate. These events were 1951-52, 1953, 1957-58, 1965-66, 1968-70, 1972-73, 1976-77, 1979-80, 1982-83, 1986-88, 1991-94, 1997-98, 2002-03, 2004-05, 2006-07, 2009-10 and 2014-16.

There's much discussion about whether the present El Nino will be extremely strong. Such as 1982-1983: One of the strongest on record: 1997-1998 : The largest on record, tied with 1982-1983 1972-1973. A moderate to strong event 2015-2016 : Among the strongest recorded.

If GLAAM switches to positive and warm ocean waters continue to flow east along the tropical equator, this means the trade winds will be nearly dead. Hence, El Nino would become stronger this winter and set the stage for a warm Northern Hemisphere winter after a potentially cold November.

Conclusion:

Natural gas markets face rising tension due to a blend of factors, including diminished U.S. output, increased exports, and expectations of higher heating demand. Labor disputes at key LNG facilities in Australia raise concerns about global supply disruptions and also are affecting U.S. prices.

Meanwhile, a decline in operational rigs by U.S. energy firms suggests a tightening domestic supply, adding complexity to market dynamics.

Hence, being in the inverse natural gas ETF ( KOLD ) is risky. One can see my weather spiders and how we broke out technically a week ago. Negative GLAAM means a cold late fall and early winter and should prevent natural gas prices ( UNG ) from falling sharply.

Currently, the biggest and most bullish risks to commodities is more damage to the cocoa ( NIB ) crop, possibly Robusta coffee in Vietnam and the wheat crop in Australia and Argentina.

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