The historic volatility in natural gas continues. Last Friday, I told WeatherWealth clients about a major change in the weather pattern with a potential colder than normal late November and December. Natural gas prices proceeded to rally $1.00 from last Thursday’s lows and bearish EIA number to this Monday’s highs ($7.22) based on other firms changing their weather forecast.
This video describes both La Nina and what we call a “negative Eastern Pacific Oscillation Index. The combination of these two climatic variables working together can produce a cold, early winter. Why then did natural gas prices pretty much give everything back in one day? Incredible.
Four Reasons for Natural Gas Moves
Here are the reasons I felt that natural gas (UNG) prices ran up too much, too quickly in the face of changing weather forecasts. After all, we had a near-record warm fall (globally) that has hurt natural gas demand. In addition, the main LNG export terminal in Freeport, Texas has been down for months.
1)Natural gas prices above $5-$6 this time of the year is very unusual as U.S. production continues to grow.
2) While the LNG export terminal will reopen soon, the weather forecast is warm for Europe. Hence, we need to see sustained cold weather, not just here in the U.S. but in Europe to help demand.
3) The weather last week was very warm across the United States and near-record temperatures this week. While potential colder late November and December weather could well occur, the natural gas market was anticipating another bearish EIA report this Thursday.
4) The European forecast models suggest that after just a week or so of U.S. cold, it will warm up again.
The European Model warms things up after Dec. 6 (red=warmer than normal). Source: Stormvista.com
So what to do in the natural gas market currently?
Based on extraordinary natural gas and weather volatility, using certain option positions is the way to go in this market. This is something we advised quite successfully in several commodity markets over the last few months.
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Domestic crude oil, natural gas, and coal sources are limited within the EU. Some member states (i.e, Malta & Luxembourg) import up to 90% of their energy.
The EU is unlikely to simply switch supplying countries, thus leaving energy supplies outside their control again. However, European manufacturers and service suppliers must all contend with a new set of unknowns. A continuing conflict in Ukraine is bringing changes in supplies of components and raw materials. The war is impacting not only wheat supplies but also Europe’s supplies of computer chips. There are also potential costs in so quickly abandoning fossil fuels.
That said, what companies might benefit from this rapid push away from Russia and toward what must be a greener future?
Europe’s New Green Deal Firmly Back on Track (for Now)
Friday, EU leaders agreed to spend the next two months drafting proposals for weaning Europe from dependency on Russian fossil fuels. Leaders set a deadline of 2027 to make Europe more energy independent. The replacement fuels will come from national and European sources, European Commission President Ursula von der Leyen said. EU climate policy chief, Frans Timmermans, stated that Europe could replace two-thirds Russian gas imports by the end of 2022
Coal and gas reserves vary wildly from country to country within the European Union. In 2020, EU production of primary energy was down by 17.7% from a decade before and 7.1% lower than in 2019. In the ten years up to 2020, European renewable energy use increased dramatically while uses of other sources declined. The EU’s recently agreed “Green New Deal” aims to make Europe carbon neutral by 2050. It included a €40bn fund to help coal-reliant regions, like Poland, move to cleaner alternatives
In addition to emphasizing renewable energy, the Green New Deal also mandates a 20% reduction in agricultural fertilizer use. Russia’s invasion of Ukraine has helped send already high fertilizer prices soaring. Global fertilizer producer Yara recently reduced production at plants in Italy and France to 45% of capacity, citing rising gas prices. According to S&P Global Commodity Insights, Dutch natural gas prices have risen 1,100% from a year ago.
Which Companies May May Benefit From These Moves?
The EU’s Green New Deal focuses on transportation, energy production, agriculture sustainability, and improved energy efficiency in buildings. Some companies, like Baywa, work in several sectors that may see increased business because of Europe’s moves away from Russian energy reliance. Companies in energy production and transportation may be most likely to benefit quickly from the energy policy change.
Europe’s moves may not benefit nuclear power development, given rising concerns about potential accidents at Ukraine’s nuclear facilities. Energy companies that could benefit include Brookfield Renewable (NYSE: BEP; TSX: BEP.UN) and Spain’s Iberdrola (OTC: IBDRY), one of the world’s largest renewable energy producers.
Another company that may benefit is Switzerland’s Meyer Burger Technology AG (OTC: MYBUF), which has a focus on solar cells and photovoltaic equipment. Germany’s Baywa (ETR: BYW6) has a focus on agriculture, renewable energy, and construction, all sectors which will be impacted by Europe’s move away from imported fuels. Baywa’s agrovoltaic development center is already working with farmers on pilot projects.
Companies providing goods and services to the public transportation sector and those with increasing production of electric vehicles have growth opportunities from this change. Alstom (EPA: ALO), the French company focused on rail infrastructure, recently acquired the rail division of Canada’s Bombardier. A renewed focus on public transportation could improve Alstom’s fortunes.
Many companies that produce electric vehicles already have long waitlists for their cars, SUVs, and trucks. Volkswagen (OTC: VWAGY) is increasing its electric vehicle production substantially in Europe, while also providing the technology for the seven new electric models that Ford (NYSE: F) will introduce in Europe by 2024.
Any of these stocks that might benefit from the EU’s decision to be independent of Russian energy will, of course, be subject to the whims of market movements. They also are dependent on the availability of raw materials and specific components. Battery improvement and production will underpin both energy and transport improvements.
Mercedes’s (OTC: DDAIF) corporate plan has been to produce only electric vehicles by 2030. To that end, the company has recently opened a battery plant in Alabama, while also taking an equity stake in European battery cell manufacturer Automotive Cells Company. Mercedes is partnering with Total Energy and Stellanis (NYSE: STLA), owner of Peugeot, in that venture.
Please see the video above about what it would take to bring cold winter weather to the energy markets. Something we call the MJO, plus the southern Plains drought, Climate Change, and La Nina will bring record warmth to the east next week and melt any snowman. But how could things change and winter turn cold, if at all? I see some signs that colder late December and early January weather will potentially put a short-term bottom in the natural gas market.
If you are an ETF trader, farmer, or commodity trader from grains too soft commodities such as coffee, natural gas, and more, you owe it to yourself to learn about the power of weather and receive a free issue of Climatelligence. Click below
CLICK ON THE VIDEO ABOVE TO HEAR ABOUT LA NINA, SUGAR PRICES, THE EASING OF THE BRAZIL DROUGHT, AND THE BIG WESTERN STORM BY OCT 26TH
LA NINA HAS CAUSED COMMODITY MARKETS FROM NATURAL GAS TO SUGAR AND COCOA TO BRING DOWN THE CRB COMMODITY INDEX
Commodity markets have been in a major bull run for the past year or so inspired by a surge in precious metals such as silver and copper, a rebound in crude oil prices, and a recent soaring natural gas, sugar, coffee, cotton, and wheat market.
The record hot U.S. summer is an indication of Climate Change on steroids. The western U.S. drought helped to exacerbate the summer heat and help natural gas prices soar. Why? Hydropower was cut off to the west, and natural gas was the alternative. An active hurricane season in the Gulf and historical tight supplies of natural gas in Europe and Asia have resulted in strong LNG natural gas exports from the U.S.
However, over the last two weeks, natural gas prices have fallen sharply inspired by my forecast of a warm late fall and weak demand. Plus, the drought out west will be easing a bit. This will allow electric companies to switch back to hydropower following the historical summer drought. This will not happen right away, and a lot more rain will be needed, but it is a start.
LA NINA GROWING STRONGER means a warm late u.s. fall and easing of the brazil drought
Sometimes weak La Nina events or east-based La Nina Modoki can bring major cold weather to U.S. energy areas. However, as I pointed out to Weather Wealth clients the last few weeks, my expectation is not for an east-based La Nina Modoki but a potentially moderate to strong standard La Nina. What does this mean? Rather than the cool ocean temperatures in the equatorial Pacific being close to Peru, the cold waters will be spread out equally. You combine La Nina with the historical drought out west, and my computer program Climate Predict suggests a warm late fall and early winter. This has caused everyone and their dog to “run for the hills” if they were long natural gas on the hot summer and tight stocks.
Stay tuned, however, certain types of stronger La Nina events can in fact bring a cold December or January. So, we do not want you to miss some of the trading opportunities we will have for Weather Wealth clients.
What an average of all la nina events suggest for winter temperatures
Shown below are all La Nina events and the tendency for winter cold to be mainly over parts of Asia, Europe, New England, and much of western Canada. Is this written in stone? Of course not. I am sure there will be some occasional cold periods and trading opportunities in natural gas and heating oil in the months ahead. However, it will be important to monitor what is also happening with Sea Ice over the Arctic, as well as many of the teleconnections (climatic variables) listed in blue, below.
One of my strongest and successful recommendations to Weather Wealth clients, was selling natural gas in early October, based on my warm October and November forecast. However, prices may have fallen too far too quickly, especially with all of winter still ahead of us.
CLIMATE PREDICT PREDICTED THE EASING OF THE BRAZIL AND WESTERN U.S. DROUGHT
While the media has been touting that La Nina conditions might intensify the Brazil drought, it has really been deforestation in the Amazon that was the main culprit of record low water levels from Parana to Sao Paulo. While some La Nina events can bring droughts to northern Brazil, it is usually southern Brazil and Argentina that have dryness between October-January during La Nina events–not northern Brazil
Warm ocean temperatures in the eastern South Atlantic is called the TSA index. The combination of a moderate to strong La Nina and certain weather conditions over Antarctica called a positive AAO index helped us predict the easing in the northern Brazil drought, more than a month ago. Indeed this past week, that has been happening.
Prices for sugar (for example) have begun to reat negatively to the easing Brazil drought, following a major bull market. La Nina could bring crop problems for corn and soybeans later this year or in early 2022
So how do you take advantage of my long-range weather forecast and investing? I invited you to a free issue of CLIMATELLIGENCE:
Why Jim Roemer Predicted A Warm Winter for Natural Gas Prices Last December
One of our most accurate trade ideas this past season was selling natural gas. That warm winter projection was in our forecast for December. WeatherBell, and many other forecast firms, kept touting cold winter models. In my opinion, they also published erroneous theories that low solar activity is more important than a warming planet. I do acknowledge that I had been in the camp for some cold early winter weather in November. However, I quickly changed that view due to various global teleconnections. Here is an article I wrote a few months ago.
Why Did Natural Gas Prices Suddenly Rally in April?
Over the past few weeks, the pandemic spawned worries about global demand for both crude oil and natural gas. This helped to pressure these energy commodities to new lows, a week ago. I recently highlighted an energy opinion in my WEATHER WEALTH weekly commodity weather blog. In that comment, I stated that lower crude and natgas prices could curtail shale production and possibly boost energy prices. The recent $7/barrel rally in crude futures off the $19 spot contract lows wasn’t based on weather. It is more tied to feelings that OPEC and Russia will have a truce in their oil production war. Longer term, once this pandemic ends, crude prices are likely to sustain a more pronounced rally.
Regarding the weather, an early spring Midwest (and Northeast) cold spell in coming weeks created short covering.
The blue trough shown above is creating some excitement in the natgas market, even though winter is practically over. Nevertheless, New England snows and Plains temps in the teens and 20s next week have created some short covering. In addition to natural gas hedgers/speculators, traders in the wheat market will also be focusing in on this.
Temperatures next Tuesday and Wednesday could actually be colder than this possibly falling into the 20s across even southern Kansas. This will interest wheat market participants who will be closely following what transpires.
The Polar Vortex break-off is responsible for two bouts of eastern and Midwest cold I expect in the next fortnight. In part, this is due to the MJO.
The MJO’s cold phase is not the only factor replacing the Polar Vortex to the south. In my opinion, El Nino’s residual effect from last winter, and other teleconnections, caused the near record warm US winter. Now, many of those teleconnections are beginning to change.
What will summer be like? How might you be able to take advantage of the natural gas and grain market? You’ll learn the answers when you sign up for a free trial to my weekly GOLD PLAN blogs.