CO - The NAO Index A Cold-Snowy March And Why Natural Gas Prices Can't Rally

2023-03-09 09:35:13 ET

Summary

• What is a negative NAO index in meteorology.
• A potential big eastern U.S. snowstorm coming.
• Factors that are capping rallies in natural gas.

A climatological phenomenon known as a negative North Atlantic Oscillation Index ((NAO)) will bring potentially a near historic March snows to the Northeast this weekend through March 17th. The NAO index has long been a climatic staple to help meteorologists forecast long-range weather, months in advance. The last few winters, the NAO index has been mostly positive.

What this means (in layman's terms) is that low pressure and the center of the Polar Vortex remains well north from Greenland to the Arctic circle. This prevents the stream of cold air to remain mostly north of primary global energy-consuming regions.

For the first time in months, the NAO will go negative. This is a warm block over Greenland, and pieces of a previous Polar Vortex will swing into primary U.S. energy areas for the rest of March. These pieces helped to spawn the incredible snows out west. A negative NAO often happens when there is stratospheric warming some 10-20 miles above the earth's surface. This helps to push the Polar Vortex south. The record warm Atlantic in combination with the -NAO coming up may spawn one of the biggest east coast Mid-March snowstorms in decades.

To learn more how we use teleconnections to make forecast for commodity traders and farmers around the globe, we invite you to our webinar next week here.

The last few weeks have seen unprecedented snows out west, on the order of 7-15 feet at such places as Lake Tahoe. Longer term, this is great news for hydropower companies, millions of western residents, and also California agriculture. The snowpack, following several years of drought, will replenish aquifers and reservoirs out west.

You can see here the potential Nor'easter by March 16th. A cold March in the Midwest and Northeast has been our forecast for the last few weeks. But why have natural gas ( UNG ) and the rest of the energy complex failed to sustain a rally?

Following a brief rally in natural gas prices a week ago above $3.00 (some 35% off its lows), why have prices been unable to stage a rally? The reasons are pretty simple: 1) Cold weather this time of the year will have much less of an impact on draws on stocks then it would (of course) earlier in the heating season; 2) Prices much above $3.00, given natural gas stocks smartly above the 5 year average is not warranted; 3) The collapse in European natural gas prices due to one of the warmest winters in history has contributed to the slide; 4) End users bought all of their winter natural gas needs last summer in the midst of the Russian-Ukraine war and had to end up "hedging" (selling) futures much of this winter because they were left holding the bag of huge inventories; 5) The easing of the western drought and historical snowfall means that this summer, much more hydropower will once again be utilized by utility companies. The last two summers extreme drought caused a switch from hydropower to natural gas usage helping to support summer natural gas prices.

So what will it take, other than just a couple weeks of temperatures 3-8 degrees below normal in the Midwest and Northeast to "jump start" natural gas? Basically, it will take a hot U.S. and European summer and an active hurricane season. Will this happen and how might you trade UNG, ProShares Ultra Bloomberg Natural Gas ( BOIL ), ProShares UltraShort Bloomberg Natural Gas ( KOLD ), and natural gas futures and options?

Conclusion:

Seasonally, heading into summer, natural gas prices always rally at least 10-20% from whatever winter low we make during the winter. Due to what I believe is a warming planet and climate change, it has worked almost like clockwork to buy natural gas ahead of summer and then sell it during the early winter in at least 7 of the last 10 years. However, La Nina and El Nino cycles have also been greatly responsible for extreme global weather. There is much talk that El Nino may develop and that this will offer important trading opportunities in this and many other commodities. We invite you to check out WeatherWealth here to find out my forecasts and trading strategies.

For further details see: