Much has been said in regards to the impact central bank rate hikes, a recession within the West and the political fallout from Russia’s invasion of Ukraine could have on commodity markets in 2023. With the brand new 12 months almost here, let’s have a look at something that hasn’t been talked about as much and may be more influential within the near term on raw materials prices, particularly those of energy: the weather.
One in every of the coldest Arctic events on record is unfolding across the majority of america, including Texas and the Southeast.
The polar outbreak is bringing the form of chill to many areas paying homage to the historical cold seen in 1983, 1989, 2000, 2010, and 2014. Blizzards have pounded regions from the upper U.S. Midwest to the Northeast. Even areas of the nation as far south as Houston, Texas, have seen low 20s or high teens Fahrenheit levels (minus 5 to minus 8, celsius) sooner or later.
The issue is, with weather being weather, these forecasts and conditions can change on a whim and result in massive price fluctuations, as they’ve with prices of , one in all the foremost sources for heating in america.
As of now, a few of the lower 48 US states are experiencing among the many coldest temperatures for late December. Other states, meanwhile, are witnessing a sustained period of notably mild weather that began concurrently with the Arctic blast and may very well be around till the previous few days of 2022.
If that’s not perplexing enough, the key weather forecast models, including the ECMWF longer-range model for Europe, proceed to support the notion that one other significant, widespread period of frigid conditions may very well be on tap throughout the second week of January.
So, what do all these mean for the energy commodities that Americans depend on for heating, from natural gas to ?
Natural gas, for one, has been subjected to a few of the worst market volatility because the first quarter of 2022, when the Ukraine invasion began.
Prices of the fuel experienced their lowest close in nine months last week, with benchmark January contract deciding on Thursday at $4.99 per million British thermal units on the Latest York Mercantile Exchange’s Henry Hub — slightly below the important thing $5 per mmBtu support. January gas did recapture the $5 threshold by Friday’s close, however the rebound was nominal. The tumble has brought the year-to-date gain in benchmark gas prices to simply about 33%. In August, they stood at almost 170% when benchmark gas hit a 2022 peak of $10 per mmBtu.
The combination of freezing and balmy weather has huge implications for natural gas consumption.
Originally, industry analysts projected that heating demand could eat up 500 billion, or bcf, from storage over the past three weeks of the 12 months — meaning that every week would average a drop of 167 bcf in volume. For an idea of how big that’s, the last time weekly gas draws were larger was 10 months ago, when 190 bcf was used up throughout the week to Feb. 12. Such inordinate demand for heating could make significant dents on the deficit already present within the five-year average for gas inventories.
Nevertheless, the primary of the three weeks only brought only 87 bcf in gas burns, even lower than the revised estimate of 93 bcf for that week.
Despite that, gas prices are more likely to end the 12 months off their lows, on account of the mixed weather outlook, in keeping with Houston-based energy markets consultancy Gelber & Associates, which says:
“While there does look like a period of moderation in temperatures that follow the height of the cold early next week, the identical longer-range weather models and indicators that accurately predicted the present Arctic intrusion are already pointing to a different winter storm of comparable magnitude to happen across the middle of January potentially.”
“With temperatures in some areas of the Central and Southern Plains set to see readings which are greater than 40 degrees below-normal throughout the outbreak, natural gas well production freeze-offs in excess of 5 bcf per day are more likely to be on the table. Spot prices for physical natural gas are poised to soar over the course of the following ten days at most key pipeline hubs across greater than half of the country.”
While natural gas is referred to as the “Bucking Bronco” of commodities on account of its volatile nature, each day gyrations of seven% to 10% a day over the past couple of weeks have left even veterans within the trade nonplussed.
What’s more spectacular is that momentum has often built on the awkward or, in the event you will, “fallacious side” of the trade. Living proof: The 11% plunge within the benchmark gas contract week-to-date when “the looming Polar outbreak isn’t small potatoes,” said Gelber in its note.
“Nevertheless, the market is more focused on the period of less cold temperatures throughout the interim,” the consultancy said.
So, what may very well be the flip situation for the market then? As said earlier, NYMEX gas prices went as high as $10 per mmBtu in August, when the weather wasn’t as hot as compared with the cold now.
Adds Gelber:
“One thing is definite: if hedge funds were invested in long-positions in NYMEX gas futures, prices would probably be soaring under the present weather conditions. If the $7-teens/MMBtu area were violated by a wave of shopping for this week, it could trigger a short-squeeze that might send NYMEX gas futures prices spiking significantly higher. Nevertheless, thus far, any short-squeeze efforts have been contained.”
And rallying gas futures could also result in rallying heating oil, a component of crude oil. Heating oil hit a record high of $4.4898 per gallon in June, forerunning the summer rally in natural gas. At Friday’s settlement, heating oil’s front-month contract on NYMEX closed at $3.2661 per gallon. It signaled heating oil’s potential to rally in sympathy with crude oil, which jumped a combined 11% over the past two weeks.
Crude oil’s rally on Friday got here on the back of threats by Russia to chop production by between 500,0000 and 700,000 barrels per day as President Vladimir Putin’s government reacted adversely to the worth cap of $60 per barrel placed on Russian exports by the G7 grouping of nations.
Still, with reference to winter, Ukraine’s leaders were reported this week to be bracing for the likelihood that Russia will sharply escalate the war against their country in a winter offensive as Moscow tries to show around losses on the battlefield and limit political backlash at home.
Heightened fighting in Ukraine often results in a spike in crude prices because the trade worries not nearly geopolitical fallout but in addition about an extra squeeze in the supply of Russian oil to the world after the West’s ban on all energy imports from the country, and the G7’s $60-per-barrel price cap set on each barrel exported by Moscow. Crude prices had hit 14-year highs of just over $130 a barrel for and a touch below $140 for global benchmark in March. As of Monday, the 2 were at around $75 and $80 per barrel, respectively.
Despite suffering severe setbacks over the primary 10 months of war, the Russian military is now laying plans for mass infantry attacks akin to the tactics employed by the Soviet Union during World War II, Mykhailo Podolyak, an adviser to the Ukraine government on the present war, said in comments carried by the Latest York Times on the weekend.
The comments got here as Ukraine’s top military and political leaders warned in a series of recent interviews that Russia was massing troops and armaments to launch a renewed ground offensive by spring that very likely would come with a second try and seize Kyiv, the Ukrainian capital.
One major caveat for the early 2023 weather outlook: Seasonally, the intensity lasts over just three months, plateauing with the onset of spring. Also, the outlook can change on a whim, as said earlier.
So, bulls don’t bet the home on the weather. And bears, don’t underestimate Mother Nature.
Completely happy Holidays and a Blessed Latest Yr to all!
Disclaimer: Barani Krishnan uses a variety of views outside his own to bring diversity to his evaluation of any market. For neutrality, he sometimes presents contrarian views and market variables. He doesn’t hold positions within the commodities and securities he writes about.
