El Nino and Energy Prices: Some Amateur Prognostication

By Vernon T., September 1, 2009, News

I have been mullng over the El Nino reports by the National Oceanic and Atmospheric Adminstration (NOAA) during the past three months and comparing them to the Department of Energy's natural gas and electricity price forecasts.

According to the DOE's analysis, the price of natural gas is expected to remain low and essentially flat through September of 2010 due to the under performing economy and huge amount of natural gas already in storage due to low demand and little production interuption due to fewer hurricanes in the Gulf of Mexico. The closing price on Frday, August 28 on the New York Mercantile Exchange was $3.02 per 10,000 million British thermal units (mmBtu); nearly a third of the price one year ago.

They make the similar anaylsis for electricity.

However, NOAA has forecast a medium to strong El Nino developing in late fall, 2009 through winter, 2010. This weather occurence usually results in warmer than normal temperatures for the North Central part of the the United States as well and the North East while providing wetter than normal conditions for the South Central region. It also tends to create wind shearing effects that impede hurricane formation.

Because the NOAA forecast is relatively new (as of August 6, 2009), that data has not been digested and incorporated in any published DOE forecast…yet. However, I expect that should the El Nino keep temperatures warm in the North this winter — where most homes are heated with natural gas– the demand will sink lower and further drive down the price.

…which in Texas means cheaper electricity.

I'll keep you posted.

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