El Nino and the energy market: Don’t bet the farm just yet!

While the UK braces itself for what experts say will be a particularly cold winter, Todd Crawford considers the potential impact on energy markets of the “Godzilla” El Nino brewing the in the pacific and “atmospheric blocking”.

As you’ve no doubt heard by now, a very strong El Nino event is brewing in the tropical Pacific Ocean. The Weather Channel is predicting it will be a record event. In fact, some are saying it will be the “Godzilla” of El Ninos. Our analysis at WSI suggests that it will rival the 1997 event as the strongest El Nino event in at least 65 years.  Given the significant and often severe weather impacts driven by strong El Nino events, this is of great importance to energy companies and market traders.

El Nino is a warming of the Pacific Ocean that historically occurs about every three to five years.  It usually brings with it changes in the jet stream that produce stronger storms across the southern U.S. throughout the winter months.  So why are meteorologists crying ‘Godzilla’ over this El Nino? Because tropical Pacific Ocean temperatures have been near-record levels this summer. Historically, these stronger El Nino events produce very warm winters across the major energy-demand centers of the northern US and this is what energy investors and utilities are banking on at the moment.

The big El Nino events also typically result in weaker wind power generation across the north-central US and the Great Lakes region, which results in lower energy supplies to the MISO and PJM power regions.  However, heating demand is also typically reduced in these regions during stronger El Nino events, so the aggregate impact on power prices is not clear.

Further, the stronger El Nino events also bring copious rainfall to southern California, which would be welcome news to those in that region who have been suffering through a severe four-year drought.

In Europe, the impacts are less clear.  The pattern over the North Atlantic plays a much bigger role in European winter weather than the tropical Pacific does, and North Atlantic patterns are notoriously fickle.  However, the very strong El Nino events of 1982-83 and 1997-98 had similar impacts on mainland Europe; that is, very warm and wet across much of the region.  And our most recent European winter forecasts suggests a very mild winter across southern and eastern Europe, with near-normal temperatures and wet conditions expected across UK and western Europe.

While the consensus is building towards a warmer winter this year, it is also important to look at other pattern drivers that may imply colder risks this winter pattern.  For example, we’ve seen evidence this summer that the polar vortex may be very receptive to what are called “blocking events”, which effectively split the polar vortex into pieces and allow these pieces to move southward into mid-latitudes, resulting in colder winters.  These blocking events may or may not overcome or modulate the expected impact of the strong El Nino event, but given the relatively small sample size of stronger El Nino events the answer is a bit unclear.

Block that jet stream

Atmospheric blocking is a general term for major disruptions in the normal flow of the Earth’s air currents. The jet stream is a permanent flow of air that moves from west to east around the globe. While it is permanent, it is far from static. Many factors can influence the jet stream’s course, including El Nino itself.

The causes of atmospheric blocking are not well understood, but the impacts of blocking are. Think of the jet stream as water flowing down a river. If you were to place a boulder in the middle of the river, the water would be forced to go around it, changing its flow.

This is precisely what happens with atmospheric blocking. Of course, we don’t see new mountains dropped into the jet stream’s path. But there are weather anomalies that can serve the same purpose–a block of warm air that sits in the jet stream’s path, for example, or complex weather interactions that end up pushing the jet stream onto a different track.

At WSI, we’ve found that strong July blocking episodes (as we had this summer) are often followed by similar strong blocking episodes the following the winter, which typically lead to colder winters, as arctic air is pulled down from the higher latitudes.

So the potential winter blocking would result in a winter that is somewhat opposite to the typical warmer strong El Nino pattern.

Which way should you lean?

In theory, a strong enough blocking event could overpower the effects of even a very strong El Nino event. But given the limited sample of strong El Nino events our uncertainty is still quite high. Remember, we only have 65 years of high-quality El Nino data to work with, and have only had six strong events during that time.  And we know even less about atmospheric blocking.

So if you’re speculating on weather impacts for the upcoming winter, which way should you lean?

At this point, the greater probabilities are still on the side of the warmer El Nino winter, especially early in the winter. The WSI seasonal forecast, which was issued in September, showed a relatively warm winter, with expected natural gas demand down a whopping 10% relative to last year.  At this time, it appears that the blocking events discussed above are unlikely early in the winter, but will become increasingly likely as the winter progresses.  By February and March, blocking and colder weather are more likely than not, resulting in increased odds of colder weather across much of the eastern US.

But our advice to everyone in the energy markets is to stay alert, follow the updated forecasts as winter arrives, and be ready to change your strategy.  Because this winter, only one thing is certain: we in the weather business are going to learn a lot more about El Nino and atmospheric blocking!