La Niña’s Here: How to Protect Your Business

By Zack Hallock, Senior Energy Services Advisor

If you’ve been waiting since last spring to get back on your skates, skis, and sleds, the slow arrival of winter must feel like an utter disappointment – wishing for cold and snow that is taking its good old time to arrive. On the other hand, if you’re closely watching energy consumption and costs for your home or business, you may be on a bit of a roller coaster ride – a result of fluctuating weather predictions that impact current and future market prices. Depending on your point of view and where you live, the rest of this winter will either be a gift or feel more like a bad dream. Let me explain why.

For starters it should come as no surprise that the continental United States experienced a dueling set of conditions through the first few months of the cold weather season. The Northwest had its wish granted with a decent amount of snowfall, whereas the Eastern half of the United States could not shake the mild fall temperatures until very recently.

As the old saying goes “what goes up must come down.” That adage could not ring truer during a La Niña winter. New England is now experiencing an increased precipitation (both rain and snow) and a downslide in temperatures, some of the coldest we’ve seen in recent years. From an energy commodities perspective we still have several mountains to climb before being able to breathe a sigh of relief, as there is a lot of winter left on the ledger. Whether it’s Henry Hub natural gas, local Basis markets, or distillates, old man winter is now in the driver’s seat threatening the bottom line for most businesses.

At this point in the winter season, you’re likely wondering how this cold transition will impact your energy costs through the first half of 2022. By understanding current forecasts, you can better prepare yourself for those weather pattern shifts. Long story short, there is no simple answer to preparing for the unpredictability of winter, so let’s start by examining the baseline prediction that Competitive Energy Services set back in October once it was reaffirmed that a La Niña winter was on the horizon.

As we discussed in “La Niña is Near: What Does That Mean for Energy Prices and Your Business?,” the mild start to winter was directly in line with winter weather expectations, especially for the Eastern half of the United States. The weather cycle prediction outlined in that article still holds true, albeit delayed a few weeks from our initial analysis. A perfect illustration of that scenario is the system that finally rolled into the Northeast this past weekend, which was initially anticipated for late December and was continually delayed into mid-January.

Before reviewing the impact that this delayed cold snap has had on the commodities markets, let’s take a deeper dive into how the existing weather pattern is leading to a complex start to 2022.

Winter 2021-22 in Review

As expected with the early prognosis for a 2021-22 La Niña advisory, we knew the Pacific Northwest would experience classic below normal temperatures, which began to set in by mid-late November. Despite the overall cool pattern at the time, there was quite a bit of snowfall variability across the West Coast and the Rockies into late December. This was highlighted by several Rocky Mountain snow reports that reflected minimal snowfall compared to the average, while some California regions like the Sierra Nevada Mountains posted 200+ inches in December alone!

Taking those immense snowfall figures into account, it’s perplexing that we have experienced one of the mildest starts to winter across the East Coast, particularly the New England region. In October, early prediction models anticipated that the Northeast would experience warmer than average temperatures as compared to the historical average for this time period, with the understanding that significant cold intrusions were imminent. These early forecasts also implied that the Northeast would likely see a reversal of this trend between mid-December to later January before turning mild again in mid- February.

So far that pattern has held true with one caveat -- the pattern was delayed about 2-3 weeks. In La Niña is Near: What Does That Mean for Energy Prices and Your Business? we also noted that La Niña events feature at least one extended bitter cold intrusion that disrupts the slightly above average longer-duration trends. The strength of these cold intrusions and their severity are highly dependent upon the position and force of the eastern Pacific upper-level ridge, and any disruptions to the Polar Vortex. This dynamic between upper atmospheric pressure systems and the strength of the Polar Vortex was perfectly exposed in transition over the final weeks of 2021 into 2022. In fact, gaining a basic understanding of atmospheric pressure modeling can influence daily business decisions, if you’re able to be nimble that is.

Interpreting Developing Weather Patterns

In addition to reading generic forecasts, it is extraordinarily useful to understand atmospheric pressure modeling as it relates to temperature expectations. The relationship between high- and low-pressure systems driving warm and cold fronts isn’t necessarily 1:1, but it certainly helps to anticipate ensuing temperatures. Simply, this relationship follows basic physics in that colder air is denser, which is in line with upper atmospheric and thus lower pressure gradients. As these upper and lower atmospheric patterns experience disruptions, this helps drive weather systems across North America. There are many resources to help clarify our understanding of pressure systems but understanding this pressure vs. elevation relationship can indirectly influence business operations. Your comprehension of these models provides the advantage of anticipating weather forecasts as far out as 10-14 days versus simply reacting to what you saw on the local news last night.

With the first half of January upon us, we’re seeing a semi-stable high-pressure system across the Northeastern Pacific. As previously stated, this Northeastern Pacific high-pressure system is a fundamental building block for a cold intrusion across the northern half the United States. This high-pressure feature can be seen in Figure 1, which was pulled last Monday, January 3 and shows a five-day pressure anomaly outlook for the January 4- 9 period. This modeling was highly referenced to anticipate the storm before the new year arrived. With high pressure features (darker red) and lower pressure features (darker blue) in constant flux, modelers often color-code for intuitive reading for those who struggle with the pressure vs. elevation relationship. In this case we see a cold front sweeping across Western Canada into the northern United States, highlighted by a different view of the same timestamp reflecting ground-level temperature anomalies (Figure 2). Both images were taken at the same time last Monday, for the same timeframe covering the Northern hemisphere.

The Global Ensemble Forecast System (GEFS) model illustrated below is an aggregation of models to help average out nuances between the 20+ weather models available to pull from. 

Figure 1.

Figure 2.

Figure 1 & 2 – Global Ensemble Forecast System (GEFS) Model – Monday, January 3, 2022

As we observed this past weekend, our first major cold intrusion for New England arrives this week into next and possibly throughout the rest of January. We are already starting to experience these cooler forecasts across the Northeast with our local ski enthusiasts are expressing their excitement. While an extended period of bitter cold for the Northeast is not a guarantee through the rest of January, the potential is still there. This will likely lead to several cold day stretches, even if not a significant Degree Day deviation from the monthly average.

Another unique aspect of La Niña winters in the Eastern United States is the sharp temperature gradient within localized weather disruptions. This sharp temperature gradient can result in explosive events we typically know as Nor’easters, or “Bomb Cyclones” as some have termed them recently. This past weekend was a good example of that temperature gradient complicating outlooks as the storm’s trajectory, intensity, and duration shifted throughout the first week of January.

What this means for the rest of Winter 2022 is that it’s probable we will experience at least one more of these large cold intrusions, likely in the month of February but possibly early March. Another hallmark of La Niña winters is the wildcard month of April, where it could easily provide a late season cooling, but the month typically ramps into an early spring.

Energy Markets Impact

Now that we have a handle on January and a sense of the remainder of winter 2022, what does this mean for energy commodities in New England? At a high level, our strategy remains the same as it was in October 2021. It is worth noting that with the delayed start to a real winter experience for most of the United States, natural gas storage was able to recover the deficit we experienced in September of last year, which Keith Sampson and Chris Brook highlighted in their blog titled “Why Have Natural Gas Prices Increased So Much?” We saw the markets react to a cold snap in late December 2021, as reflected in the Basis chart below (Figure 3).

On New England Basis, we see winter 2021-22 reflecting the current New England exposure to the Global LNG Market with the significant spike in Basis over that mid-Dec 2021 cold snap. That exposure to the Global LNG Market is here to stay and is thus already pushing the winter 2022-23 Basis curve upward, causing concerns for next winter. 

Figure 3.

In addition to the Basis market, the national price-point for natural gas reflected as NYMEX has significantly softened from its high trajectory in September 2021 (Figure 4). The short-term delay to winter helped erode the storage deficit and bring the winter 2021-22 prices back down to the winter 2022-23 range. It should be emphasized that winter 2022-23 commodities are still trading at a premium to the outer years. This elevated futures market means we are not out of the woods just yet from a storage and supply perspective. The narrow supply inventories we’re balancing is reflected by higher volatility over the recent months, especially in the near term. As we continue through winter 2021-22, we can expect to see this same trend manifest in the winter 2022-23 strip unless production can overcompensate seasonal demand and refill the lacking global inventories. 

For those of you who need to continually burn fuel onsite through the spring, it’s important to pay attention to these forecasts in order to mitigate risk to your bottom line. If you’re unsure what is considered a risky contract or consumption profile, CES advises customers continuously throughout the winter. When in doubt, give me a call. I’m always happy to talk weather forecasts – that is unless I’m out on the ski slopes myself!

Button Up and Prepare

For the remainder of winter, we expect to see continued higher spot electricity and natural gas prices due to elevated demand in New England. During upcoming cold snaps, spot market prices can run much higher than those with fixed contract rates, so it is important to understand your consumption profile and contract structure. If you have the ability to shift hours of operations to avoid these higher spot markets, winter weather certainly will test those abilities. For liquid fuel customers, keep an eye on your run rate compared to contracted volumes. If New England experiences a consistent stretch of cold weather, you could run through contracted gallons quicker than expected. In that case, you may take some deliveries at elevated market prices toward the end of the heating season.

We have all witnessed local and national markets reacting to cold intrusions over the last several months. It’s safe to anticipate that trend continuing throughout this tight-supply winter. Now that you have a better sense of pressure systems guiding temperature systems across America, you will be better prepared than ever. With La Niña influencing above-average temperatures in New England, we will experience some mitigated risk this winter. However, the ability for a quick pattern change with La Niña cannot be discounted, particularly in New England.

Bottom line, preparation is important. And it’s never too late to start. Quick weather pattern changes can occur at any time during the winter season. Being prepared helps mitigate the risk to operations, budgets, and annual bottom lines. Energy commodities remain “risk-on” as they were back in October, with the same narrative holding true, so get a plan in place if you haven’t done so already. This will also help you prepare for next winter, too.

If you’re uncertain about the status of your energy contracts for next winter, please feel free to reach out to a CES Energy Advisor today. 

Photo by: Aaron Burden

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