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The combination of a warming Arctic and a series of strong storms (Atmospheric River) pounding the west coast is having the following effects on commodities:
Jim Roemer
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The grain market has been influenced by a variety of factors in the last few months ranging from previous China Covid lockdowns (bearish), poor demand for corn and wheat (bearish), big Australian wheat crops hitting the market (bearish), a potential huge Brazilian soybean and corn crop (bearish) vs the expanding Argentina La Nina type drought (potentially bullish later).
Corn pollination begins in Argentina in the next few weeks and there is little hope of any major relief. I think the Argentina corn crop will eventually fall below 50 MMT.
Till now, corn and wheat traders have basically “yawned” at the expanding Plains drought for wheat (the worst early planted crop in about 20 years from Kansas to Texas) and the drought in Argentina. Why? A couple of reasons 1) The demand side of the equation has been poor; 2) Wheat has 9 lives and commercial grain companies will not panic unless La Nina continues next spring and timely rains do not fall in the important April-May time period.
The one big winner in the grain sector lately has been soybeans. Look at the seasonal of long soybean meal in December that has worked in 13 of the last 15 years and how prices previously skyrocketed.
Source: Moore Financial Research
Source: Stormvista models and Weather Bell
With respect to the corn market, again, I expect that prices may bottom soon due to this extreme heat, and La Nina is still alive and well.
But what about next spring and summer? In 75% of the cases since 1950 when La Nina eased and transitioned to a neutral climatic shift, corn and soybean crops were above trend-line. This would be a long-term bearish signal later next year, in which a 15-30% drop in grain prices would occur from whatever highs we make this winter.
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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.
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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Here are the headlines from one of our recent Weather Wealth reports.
REMEMBER, THERE IS A RISK IN COMMODITY TRADING. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
HELPING YOU MAKE THE BEST INVESTMENT DECISIONS BASED ON THE WEATHER