Meteorologists are already anticipating a strong El Niño event that could last through early spring. As the weather pattern strengthens, some markets and exchange traded funds could be adversely affected.
“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.
Among the ETFs that could be potentially vulnerable to El Niño is the already battered First Trust ISE-Revere Natural Gas Index Fund (NYSEArca: FCG). FCG, which is comprised of natural gas exploration and production companies, is off nearly 39% over the past three months. Natural gas prices have hovered near record lows after the shale oil boom in the U.S. pressured both gas and oil prices.
Meanwhile, energy producers, like Range Resources Corp. (NYSE: RRC) and Chesapeake ENergy Corp. (NYSE: CHK), have cut their forecast for the year, citing a broad collapse in energy prices for oil and other similar liquid fuels.
“The strongest El Niño in 65 years, which ‘should drive warmer-than-normal temperatures across much of the northern U.S., as the polar jet stream weakens and lifts northward‘. Accordingly, WSI projects natural gas demand this winter to be 10% lower than the previous one,” according to OilPrice.com. “With this in mind, and with storage levels already 16% higher than last year, and 4% higher than the five-year average, it provides some color as to why the January contract (aka the bleak mid-winter) is currently at a 16-year low.”
Greater industry consolidation could also lead to higher costs for producers and higher gas prices. Improved technologies to drilling would lower costs and gas prices going forward. Lastly, a weaker economy could lead to diminished drilling activity and higher gas prices.
The natural gas inventory build is surprising, given that this summer was hotter than the last two and the 10-year average, which added to electricity consumption that required 4 billion cubic feet more natural gas than in 2014 to meet air conditioning demand. However, energy watchers attributed the steady build in gas storage to rising output from U.S. shale oil operations. [Warm El Niño Weather Could Cool Energy ETFs This Winter]
First Trust ISE-Revere Natural Gas Index Fund
