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How Weather Forecasts Impact Energy Prices

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Forecasting the weather is tough and putting together a forecast entails science, statistics and analysis. For energy market participants, such as buyers, sellers, producers, consumers and traders, it is recognized that weather is often the most important driver of energy prices; mostly through the temperature’s impact on demand for heating or air conditioning. Basically, everyone in the energy market is looking for an edge to help predict the weather.

On February 15, prompt month natural gas prices fell to $3.15 per MMBtu, very close to the two-month low. There seemed to be general consensus among weather forecasters that March would be 2 to 4 degrees above normal. Now a month later, the NYMEX is at $3.82 – the highest price since Thanksgiving. What happened?

By the last week of February, the March forecast was changing dramatically as cold weather was expected. On February 13 a snowstorm crushed New England. And then another storm hammered Chicago and the Midwest. Whoops.

Predictions vary across the many public and private sources of forecasts, especially for any term beyond 15 days. There are more variables and more uncertainty such as the Jet Stream, La Nina and El Nino, impacts of drought, snow cover, North Atlantic Oscillation, water temperatures in the Gulf of Mexico, etc. No wonder it is tough to predict weather!

In regards to the energy market, you need to pay attention. Weather does often directionally drive prices, and forecasts are the best information we have. Be cautious though because if the forecast is wrong or if it changes, the market will move immediately. So be ready to move … and move fast!

On a weather-related note, I just want to quickly recommend a great read, “Isaac’s Storm” by Erik Larson. It is about a hurricane taking the city of Galveston completely by surprise at the beginning of the 20th century, thanks to lack of accurate weather prediction. Ironically, the storm hit Cuba just a few days earlier. Thank goodness for the advancement of weather forecasting!

Posted: March 18, 2013

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