El Niño Alarms Prove to be False

It Could Be a Cold Winter

AAPG's unofficial expert on the El Niño phenomenon and its effect on natural gas prices says he does not expect to see $10 gas prices again this year -- but he does anticipate steady gas prices through this winter.

Michael Wilson, an AAPG member and consultant based in Evergreen, Colo., first became interested in El Niño events during 1994, when he noticed that the 1994-95 El Niño coincided with a mild winter, falling natural gas prices and a wave of layoffs and mergers in Colorado's energy sector.

He discovered that similar events had occurred after the 1991-92 El Niño, and wondered, "Why do El Niño events cause so much stress for the gas business?"

Wilson then began collecting climate data from the National Oceanic and Atmospheric Administration and the Center for Ocean-Atmosphere Prediction Studies. He correlated climate data with heating degree-day counts, Henry Hub spot gas prices, gas consumption data and gas company earnings.

He sorted the data according to the three ENSO phases (El Niño, Neutral and La Niña), and eventually found out why El Niño events cause problems for the natural gas industry: They shift the Pacific jet stream southward and bring warm winters to the Great Lakes region.

"The Great Lakes region is the key to the central U.S. gas market," Wilson said. "In a state-by-state breakout, you can see that Illinois, Indiana, Pennsylvania, Minnesota, Michigan and New York are major gas users. During mild winters, reduced demand for heating fuels affects spot gas prices."

Please log in to read the full article

AAPG's unofficial expert on the El Niño phenomenon and its effect on natural gas prices says he does not expect to see $10 gas prices again this year -- but he does anticipate steady gas prices through this winter.

Michael Wilson, an AAPG member and consultant based in Evergreen, Colo., first became interested in El Niño events during 1994, when he noticed that the 1994-95 El Niño coincided with a mild winter, falling natural gas prices and a wave of layoffs and mergers in Colorado's energy sector.

He discovered that similar events had occurred after the 1991-92 El Niño, and wondered, "Why do El Niño events cause so much stress for the gas business?"

Wilson then began collecting climate data from the National Oceanic and Atmospheric Administration and the Center for Ocean-Atmosphere Prediction Studies. He correlated climate data with heating degree-day counts, Henry Hub spot gas prices, gas consumption data and gas company earnings.

He sorted the data according to the three ENSO phases (El Niño, Neutral and La Niña), and eventually found out why El Niño events cause problems for the natural gas industry: They shift the Pacific jet stream southward and bring warm winters to the Great Lakes region.

"The Great Lakes region is the key to the central U.S. gas market," Wilson said. "In a state-by-state breakout, you can see that Illinois, Indiana, Pennsylvania, Minnesota, Michigan and New York are major gas users. During mild winters, reduced demand for heating fuels affects spot gas prices."

Obviously, low spot prices hurt the profits of the companies who sell gas into this market.

La Niña events also produce warm winters, but they mainly affect the southeastern United States.

"During the cold phase, the jet stream shifts north over Vancouver, and blows along the Canadian border," he said. "It blocks the cold fronts and creates mild winters in the central and southeastern United States. Recent La Niña events correlate with weak gas prices and mediocre gas company profits.

"All in all, two out of three ENSO phases cause mild winters and are bad for the gas business," Wilson said. "No wonder the gas sector is so cyclical."

ENSO phases oscillate back and forth but aren't very regular. Historically, the interval between one El Niño event and the next is usually three to five years.

Looking back, there was a giant El Niño event during the 1997-98 winter. Then temperatures in the Pacific Ocean cooled down into a long-lasting La Niña phase, which continued through the winters of 1998-99 and 1999-2000.

"We had three unusually mild winters in a row," Wilson noted. "It was a long run of bad luck for the energy industry."

But sea surface temperatures in the central Pacific finally came back to neutral a year ago -- and neutral phases have been the best for the gas business. Wilson's correlations show that neutral sea surface temperatures in the central Pacific correlate with the coldest winters in the Chicago-Great Lakes region, the highest Henry Hub spot gas prices and the highest gas company profits.

"I saw the neutral phase developing a year ago, and decided to hold onto some drilling stocks I'd bought when prices collapsed during the 1997-98 El Niño," he said. "Sure enough, those drilling stocks went right back up along with oil and gas prices -- $10 gas and $28 oil. I sold most of my drilling stocks in February 2001, just as gas prices peaked."

Sea surface temperatures in the central Pacific have remained neutral during most of this year.

"But during July and August, a warm sea surface temperature anomaly showed up between Panama and the Galapagos Islands," he said. "NOAA put out a couple of warnings indicating that if the warm anomaly continued to expand, we might have a mild El Niño during the winter of 2001-2002."

Since then, however, the warm anomaly has receded slightly.

"It was a false alarm," Wilson said. "Now it looks very neutral out there in the central Pacific, and the temperatures seem to have stabilized."

He noted that the Pacific jet stream has been wobbling back and forth a lot recently, but several cold fronts have come down into the central United States -- including one that triggered snow in North Dakota a few weeks ago.

Wilson said that this winter could be unusually cold, resulting in strong demand for heating fuels.

"On the flip side, the numbers coming in from the gas storage facilities indicate high fill-up this year," he said, so there's plenty of gas in storage."

California's electricity crisis has subsided, the U.S. economy is in a downturn and oil prices have been falling.

"Manufacturing numbers are down and there are layoffs and factory closings," he said. "Industrial demand may slump this winter. I expect steady spot gas prices, but I don't expect to see $10 again for quite a while."

"OPEC keeps shifting gears -- they're always a wild card -- but the ENSO cycle goes on and on. The weather never stops."

uzccardtftvxwubeavuxuatauvbveavee

You may also be interested in ...

AAPGAmpPageTokens:PFArticles_Multiple_ParametersRZ_Related(searchword="explorerorg",sort="Random",limititems="4",dayslimit="10000",Category="",Issue="'61,1,2,3'",SponsorSW="explorersponsored",SponsorCategory="",SponsorIssue="1plus4 Rotation",SponsorLimitItems="2",Region="",EventEndDaysLimit="",RelatedArticles="Category",numberperrow="4",position="10",mode="",NumPages="n",ArticleId=)