Gas Crisis: What will the weather be like next winter?

World energy markets are in the midst of the worst natural gas and LNG crisis in history. And Europe is a bit more in trouble than the rest of the world.

A cold spell during the coming winter would definitely push Europe over the cliff. There is not enough gas in storage to meet the peak demand during a cold winter outbreak.?Europeans will fight tooth and nail for the limited spot LNG cargoes with their Asian peers.?In addition, it is highly unlikely that Russia will ramp up its supply, if the country delivers gas at all.

Climate Drivers: La Ni?a and other phenomena

The million-dollar question both energy commodity traders and policy makers alike should be asking is what kind of winter will both Europe and Asia experience?

Unfortunately, the physics of the atmosphere makes insight into the coming winter difficult to determine in July.?We know, however, that La Ni?a currently remains strong for the third year in a row and is forecast to remain at least moderately strong until early winter.

The World Climate Service, a long-range forecasting tool widely used in the energy trading industry, shows the Copernicus Climate Change Service seasonal model forecasts of the Ni?o3.4 index, a primary indicator of the strength of La Ni?a/El Ni?o.

The occurrence of two consecutive La Ni?a winters in the Northern Hemisphere is common but having three in a row is relatively rare.?It has happened only twice since 1950.

La Ni?a and its more famous counterpart El Ni?o change the tropical Pacific sea surface temperatures every few years.?The sea surface temperature changes impact global circulation and can affect climate conditions in places as far away as Europe.?La Ni?a decreases the probability of a warmer than normal winter in western and southern Europe.

Analyzing prior years with La Ni?a conditions in December, January, and February reveals increased chances of cooler than normal years across much of southern Europe.?Northern Europe, however, has increased chances of warmer than normal temperatures.?Provided by the World Climate Service

La Ni?a in the Pacific Ocean is not the only important European wintertime climate driver.?Another important ocean phenomenon closer to home is the Atlantic Multidecadal Oscillation (AMO), which reflects Atlantic Ocean temperature variations that have been shown to influence the European climate.?The AMO, which changes on decadal timescales, has been generally positive for more than 20 years and there is no reason to expect it to transition to negative before winter starts.

Adding the influence of a positive AMO in the analysis of likely European winter outcomes substantially increases the possibility of colder than normal temperatures.

The AMO index has been positive for many years.?Past years with both La Ni?a conditions and positive AMO during winter months substantially increases the probability of a cold winter. Provided by the World Climate Service.

Finally, we can’t exclude the possibility of a “polar vortex” event generating extreme cold conditions.?During the winter of 2020/21 a polar vortex weakening event sent chills from the North Pole down to the US, Europe and East Asia. When cold air descended upon Western Europe and China in January during the winter of 20/21, prices for gas in Europe and LNG in Asia reached record highs. Regions of Spain, including Madrid, experienced temperatures of -16°C degrees while Beijing temperatures fell to a record low of minus -19°C in early January. January’s icy blast meant the third highest number of European heating degree days in 40 years.

Much of Europe experienced colder than normal temperatures during January of 2021.?Gas and LNG prices in Europe and China reached record highs during this time.?Provided by the World Climate Service.

Manage Gas Price Risk with the Right Forecast Information

Although the third year of La Ni?a conditions in the tropical Pacific Ocean is forecasted, the winter 2022/23 forecast remains quite uncertain for Europe. Seasonal and sub-seasonal climate forecasting is an inherently probabilistic game.?It is important that energy commodity traders understand the likelihood of different possible outcomes rather than relying blindly on a temperature anomaly map for a period of months in the future. Probabilistic outlooks enable the sophisticated trader to better weigh the risks of the trade they are about to make.?That way, when a forecast for a cold winter results in a false alarm, they’ve understood the probability of that occurrence and were properly hedged.

Europe experienced a mild winter in 2021/2022, saving energy markets from a gas disaster because of the low storage levels at that time.?The current political environment and continued competition from China for energy resources elevate the risk that Europe won’t be saved by another warm winter.

The winter seasonal and sub-seasonal temperature forecasts may be an important driver of market volatility and uncertainty in the coming months. So traders and policymakers alike should have a credible, reliable source for this information.

Readers can manage weather-induced gas price risks with long-range forecasts prepared by the World Climate Service.?The World Climate Service has 13 years of experience creating long-range forecast products for energy commodity trading organizations.?

Article written by Jan Dutton of the World Climate Service and Kasper Walet of Maycroft