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Prospect of Strong El Niño Weighs on U.S. Gas Prices


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A drilling rig on a lease owned by Oasis Petroleum operates in the Permian Basin oil and natural gas production area near Wink
A drilling rig on a lease owned by Oasis Petroleum operates in the Permian Basin oil and natural gas production area near Wink, Texas U.S. August 22, 2018. REUTERS

(Reuters) – Rapidly forming El Niño conditions over the central and eastern Pacific Ocean have increased the probability of a strong episode this winter that would likely raise temperatures and cut gas consumption in the United States.

Sea surface temperatures in the most critical region of the ocean have warmed rapidly and have been almost +1.3°C above the long-term seasonal average so far in August having started the year -0.7°C below average in January.

The speed and strength of the warming has significantly increased the probability El Niño will prevail this winter and that it could be a strong rather than a weak one.

In its latest outlook, published on August 28, the U.S. Climate Prediction Centre put the probability of El Niño occurring between December and February at more than 95% and says most models show it will be strong.

El Niño is characterised by sea surface temperatures persistently +0.5°C or more above average and a strong episode occurs when temperatures are persistently +1.5°C or more above average.

The strength of El Niño matters because a weak or moderate episode is likely to be dominated by other factors influencing the weather and have little or no observable impact on temperatures and heating demand.

But a strong El Niño tends to produce a significant and observable impact on weather patterns, lowering gas consumption and prices.

A strong El Niño is generally associated with warmer-than-average winter temperatures across the United States, especially in the northern tier of states stretching from Washington through Illinois to Maine.

Chartbook: El Nino and U.S. heating demand

Since 1950, there have been six strong El Niño episodes during the northern hemisphere winter (1957/58, 1965/66, 1982/83, 1991/92, 1997/98 and 2015/16) and one borderline case (2009/10).

Since 1973, during winters with a strong episode, the number of U.S. heating degree days was 7% lower on average compared with years without (or 10% lower if the borderline case is excluded).

The impact is only observable for strong episodes – there was no significant difference in heating degree days between all El Niño years and all non-El Niño years.

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So the outlook for gas, electricity and heating oil consumption and prices depends critically on the strength of the episode that is currently developing.

Winter is still three months or more in the future and the progression of El Niño conditions is subject to some uncertainty.

But there is a strong correlation between sea surface temperatures in August and those prevailing subsequently between December and February.

Sea surface temperatures have only been this far above the trend-adjusted seasonal average in August six times in the last 70 years (in 1957, 1965, 1972, 1987, 1997 and 2015).

On four of those six occasions, strong El Niño conditions prevailed the following winter (1957/58, 1987/88, 1997/98 and 2015/16).

Conversely, the seven strong winter El Niño’s since 1950 have been preceded on average by sea surface temperatures +1.25°C above normal the previous August.

Current sea surface temperatures are already slightly above that threshold.

It is worth repeating that El Niño is not the only influence on winter temperatures in the United States or even the dominant one.

But a strong El Niño would make warmer-than-average temperatures more likely depressing energy consumption and prices.

The rapid development of a strong El Niño helps explain why U.S. gas prices remain low in real terms despite the recent depletion of working gas inventories.

Traders have started to anticipate a strong El Niño will reduce gas consumption for heating and power generation this winter.

John Kemp is a Reuters market analyst. The views expressed are his own



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