Winter 2009-2010 Outlook: Chalk One Up for the Farmer’s Almanac

Obviously, today’s storm is not a hurricane, but it relates well with the theme of the post. This will be the final storm in the contest. “Awards Ceremony” tomorrow…

As we move into the fourth quarter, I thought it would be appropriate for my penultimate post to discuss what we might expect from Mother Nature over the next 4-6 months, and its possible repercussions for the stock market.

Before discussing the meteorological driving forces behind the upcoming winter, let’s start with a look at one of the oldest “forecasting” tools out there: The Old Farmer’s Almanac. First published in 1818, the Almanac uses the voodoo-pseudo-science of sunspot activity, tides, and planetary position to predict the upcoming winter, which is spelled out by their chief “meteorologist”, an entity known only as Caleb Weatherbee, who has apparently been around since the publication’s founding.

Now, I don’t mean to bash the Almanac, and will admit to buying and perusing a copy upon its release each year, but their claim of an 85% accuracy rate is questionable at best. Even modern meteorology, supported by supercomputers, satellites, and PhDs from MIT, can’t boast that level of forecasting. Besides, what defines an “inaccurate” forecast from an “accurate forecast”: having it be sunny when the forecast said precipitation, having it rain when the forecast said snow, receiving eight inches of snow when the forecast said seven, etc?

Anyways, I don’t usually put too much faith in the Farmer’s Alamanac and usually read it primarily for its entertainment value. Nevertheless, Figure 1 below shows their forecast for the upcoming winter season.

Figure 1: Winter 2009-2010 Forecast Issued by the Farmer’s Almanac

The primary observation one draws from this forecast is that it is going to be cold just about everywhere (except the Southeast and Southwest). Additionally, the East Coast can expect to see snowier-than-average conditions while the Midwest and West can expect drier-than-average conditions.

With these initial observations in mind, let’s consider the non-tea-leaf-based meteorology.

There are two driving forces for the upcoming winter, and I will briefly discuss each one in turn.

Persistence

Unless you have been living in the Pacific Northwest, Summer 2009 has generally been exceptionally cool, particularly across the Midwest, Mid-Atlantic, and Northeast.

The cool weather pattern arose due to an unusually amplified (i.e. wavy) jet-stream with a large ridge of high pressure in the West (hence their above average weather) and a complementary trough in the East, which brought a cool Canadian airmass southward and was accompanied by an active storm track. This situation is shown below in Figure 3.

Figure 2: Primary weather pattern in the Summer of 2009 featuring warmth in the West, cool weather in the Midwest and Northeast, and an active storm track.

Climatologically, patterns tend to persist and a cool summer has historically resulted in a cool winter. Thus, based on persistence, one might expect cool weather east of the Rockies and warmer weather in the West. Additionally, a large ridge is characteristic of High Pressure, meaning drier conditions in the west as well. Likewise, a trough off the east coast results in a storm track that zips nor’easter-type storms up the East Coast, as has been seen several times this summer, most recently this past weekend.

El Nino

El Nino will probably not be as big a factor in the upcoming winter as some were anticipating a few months ago. The El Nino of 2009 has weakened since peaking as a moderate event in July and is dwarfed by the great El Nino of 1997-98, and is now similar to the weak El Ninos we saw in the winters of 2002-2003, 2004-2005, and 2006-2007. A map of traditional El Nino effects is shown below in Figure 3.

Figure 3: Typical conditions during an El Nino year, featuring cool and wet conditions across the South and warm and dry conditions across the Midwest and Great Plains.

Historically, El Nino has resulted in warmer than average conditions across the northern half of the country (with the exception of the extreme Northeast) and cooler-than-average conditions across the southern half. This is due to the Polar Jet Stream being displaced to the north, with a much larger-than-average ridge building in the west and Midwest and a weaker-than-average trough across the East. This results in both warmer and drier than average conditions across these regions.

The south is generally wetter than normal due to a very fast west-to-east Subtropical Jetstream that cuts from Baja California across the Southeast. The frequent rainfall and cloudiness associated with the Jetstream helps to keep these areas below average. Due to the rather flat, un-amplified Jetstream, the Northeast and Mid-Atlantic does not see the powerful nor’easters that it can see with a highly active jet.

Dr. Cane’s Forecast: Party Like Its 2002-2003

Considering both a weak El Nino and the persistent weather pattern in the United States, my predictions for the winter of 2009-2010 are highlighted below in Figure 4.

Figure 4: My predictions for the upcoming winter taking into account our persistent weather pattern and a weak El Nino

• I expect a potentially cold and snowy winter across the Northeast and Mid-Atlantic due to a persistent trough pumping in cold air and carrying storms through the region.
• I expect wetter than normal conditions across much of the South due to a strong subtropical Jetstream associated with a weak El Nino
• I expect dry and generally tranquil conditions across the upper Mid-west and Plains as a ridge of high pressure dominates this region.
• Elsewhere, I see equal chances of it being warm/cool and dry/wet.

Based on these forecasts, I expect a winter somewhat similar to that of 2002-2003, another weak El Nino event that featured a persistent trough in the East, bringing some big-time snow on the East Coast. The President’s Day Storm of February 14-16, 2003 covered all of the major cities with at least 15-30 inches of snow, with parts of Baltimore picking up 3 feet! The snow was piled so deep across such a wide area that the snowcover was clearly visible from space, as shown below.

Figure 5: Snowcover in the in the East following the President’s Day Storm of 2003. All of the white in the Midwest and East are not clouds but rather very deep snow on the ground that can be seen from space.

The winter ranks among the top 10 snowiest for many areas east of the Mississippi River. Additionally, bitterly cold air frequently dove down from Canada inundating the Midwest and Northeast with below zero temperatures.

In conclusion, let’s look back at the projections made by the Farmer’s Almanac in Figure 1. Whadya know, they actually look pretty good! They too project a wet and snowy time of it across the Northeast and Southeast with dry conditions in the Midwest. I believe they  are overdoing the extent of the cold air in the upper mid-west, since weak El Nino conditions tend to moderate air-masses in this part of the nation. That being said, I find myself in surprising agreement with much of their forecast.

Perhaps Mercury being in retrograde can tell me if it will rain tomorrow after all…

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Winter and the Markets: Shades of 2002-2003

While cool, moderate weather was terrible for the futures markets during the summer, cold, bitter weather jacks up heating demand during the winter and can result in price spikes in the energy markets. As I expect the coolest weather to occur across the densely populated East Coast and Midwest, this could be precisely what the natural gas market needs to reverse its current supply glut.

As El Nino will likely play a role in the upcoming winter season, it may be beneficial to look back at weak El Nino events from recent years for some comparison. Fortunately, we have had three this decade alone–in 2002-2003, in 2004-2005, and in 2006-2007. Figure 6 below shows natural gas withdrawals during these years compared to the five-year average during that time.

Figure 6: Natural Gas Withdrawals during the winter in weak El Nino years. Note that 2004 and 2006 are near to just below average while 2002 is substantially below average.

Natural Gas withdrawals during these years were near-to-below average, or in the case of 2002-2003, a particularly snowy winter across the Northeast as already noted, significantly below average. Based on my “cold and snowy forecast” I am anticipating a withdrawal season somewhat similar to that of 2002-2003, which bottomed at roughly 600 bcf BELOW the seasonal average. Given that we are currently 525 bcf ABOVE the seasonal average, such a winter would just about sort out the NG market’s supply problems. How nice and tidy.

Not only is the prospective meteorological environment in 2009-2010 similar to 2002-2003, but I see a correlation between the state of the two natural gas marekts as well.

Due to increased production and a declining economy, natural gas prices fell from $7.00/MMBTU to as low as $2.00/MMBTU early in 2002, leading to a drastic 50% cut in the rig count by the summer of 2002, similar to what we have seen in 2009.  A comparison of the rig count cuts is shown below in Figure 7. Notice the close correlation between the two periods.

Figure 7: Changes in rig counts leading up to the cold winter of 2002 compared to our current period

The cold and snowy winter that followed in 2002-2003 led to rapid withdrawals and saw the commodity rally by nearly 250% to $9.00 by the end of the 2003 withdrawal season! Granted, this was before the rise of horizontal drilling and other highly efficient recovery techniques that we now have, but it gives a potential blue print to the effect of both a cold winter and falling rig counts.

Conclusion: Weak El Nino + Persistent East Coast Trough + Rig Cuts = Winter 2002-2003=NG Price Spike?

Based on this rather crude forecasting and estimating, I continue to maintain my natural gas exposure in the form of Chesapeake ($22), Southwestern Energy (SWN) and Flotek ($2.00), and may consider adding to my FTK position..

In terms of opportunities outside of the energy sphere, I may look at the following sectors.

1)      Utility Companies-benefit from high electricity demand during cold and stormy weather.

2)      Home Improvement-Companies like Lowes and Home Depot do a brisk business leading up to winter storms and, in the case of damaging ice storms, the recovery afterwards

3)      Rock Salt (Calcium Chloride) manufacturers? I’ve always wondered about this one since there is enormous volatility in consumption depending on the weather, but haven’t found any publicly traded companies specializing in the product.

As my term ends tomorrow 9/30, I will have a final concluding post with some last thoughts….

Note I: Dr. Cane is now on Twitter as DrCane09 since this is often a faster way to provide updates as things quickly change. FOLLOW ME for regular updates regarding the Tropics, Trading, and misc other weather stuff.

Note II: The Hurricane Naming Contest is on the homestretch with the season finale coinciding with the end of the MLB season September 30. Current leaders are shown below.

Obviously, today’s storm is not a hurricane, but it relates well to the theme of this post…

Rankings 9/29/09

	Points	Points Back	Days to Elimination
1. DPeezy	16	–	–
2. Wabisabi	12	4.0	Playing For Pride
3. TraderCaddy	4	12.0	Playing For Pride
4. Yogi & Boo Boo	3	13.0	Playing For Pride
4. BuffaloUdders	3	13.0	Playing For Pride
4.  Jimmy Hill 7. Jim	3 1	13.0 15.0	Playing For Pride Playing For Pride

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