A strengthening El Niño weather system could push temperatures above normal levels this winter, potentially pressuring heating demand and energy-related exchange traded funds.
“If El Niño holds according to plan it would be warmer and drier than normal this winter in the Northeast,” Dan Leonard, senior meteorologist at Weather Services International, told CNBC.
The El Niño weather condition causes unusually warm ocean temperatures in the equatorial Pacific and potentially a warmer winter across the U.S. Weather models project the conditions could last well into next year.
Consequently, Leonard warned that the warmer conditions could cause a dip in demand for energy, notably natural gas.
“El Nino will probably stay strong at the top of the charts all the way through December, January and February, and then taper off,” Illinois state climatologist Jim Angel said, according to Yankton. “But it still stays at about 70 percent chance in March, April and May. For December, January and February, during the core winter months, there is an increased chance of above average temperatures through the central United States. El Nino tends to reduce winter snowfall in some cases, so that might be another side effect of El Nino this winter is decreased snow fall.”
The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, has already declined 34.3% year-to-date. Meanwhile, the U.S. Heating Oil Fund (NYSEArca: UHN) decreased 15.9% and the United States Natural Gas Fund (NYSEArca: UNG) dropped 10.9% so far this year.
Energy traders can also hedge against falling natural prices in the face of lower demand with inverse ETFs. For instance, the VelocityShares Daily 3x Inverse Natural Gas ETN (NYSEArca: DGAZ) seeks to provide the daily inverse 3x, or -300%, performance of the NYMEX natural gas futures. The ProShares UltraShort Bloomberg Natural Gas (NYSEArca: KOLD) provides the daily inverse 2x, or -200%, performance. [High Stockpiles Sap Energy from Natural Gas ETF]
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Max Chen contributed to this article.