Cold weather can disrupt energy production and transportation, cause unpredictable demand spikes, and bring geopolitical issues to the fore.
Winter is coming, and with it, a range of implications for energy prices and markets. Cold weather can disrupt energy production and transportation, cause unpredictable demand spikes, and bring geopolitical issues to the fore. It’s also expected to be a record “El Nino” winter, which means that warm currents in the Pacific Ocean will disrupt global weather patterns and bring a range of unusual climate events, which could include unseasonably warm temperatures in the northern United States, and colder temperatures in Europe. Here are some of the stories to watch for the 2015-2016 season.
Winter weather sidelines frackers
The past two years, news reports showed that icy weather was responsible for impairing fracking operations around the country, from North Dakota to Texas. Intense precipitation and freezing temperatures had the impact of damaging equipment and impacting workers’ abilities to travel to job sites. Since fracking is a highly water intensive process, freezing temperatures can cause ice to form in water tanks and pipelines, and can even freeze the oil itself. Workers have found that Bakken oil freezes into a plastic-like substance when temperatures fall below minus 40F. These factors can cause meaningful disruptions—a few years ago, a single snowstorm disrupted roughly 5 percent of North Dakota’s oil production, according to the state’s Industrial Commission.
Producers are facing leaner conditions this year as low oil prices drag on, and many players are facing bankruptcy. Strange as it may seem, El Nino could make things worse.
This disruption occurred in 2013, when oil prices were high and producers had a cash cushion to buffer against extreme weather. Producers are facing leaner conditions this year as low oil prices drag on, and many players are facing bankruptcy. Strange as it may seem, El Nino could make things worse. According to The Weather Channel, the weather pattern is likely to make temperatures in the United States warmer in the north and colder in the south, while also driving a significant increase in precipitation. North Dakota’s producers might experience less freezing conditions that stall operations, but powerful snowstorms could still damage equipment. Producers in Texas could also be challenged if they are unprepared for unusually harsh winter conditions.
Natural gas prices in Northeast U.S.
Reversing recent trends, it’s expected to be a mild winter for natural gas. In winter 2013-2014, New England suffered from regional natural gas constraints and price spikes, even as production surged from nearby states such as Pennsylvania and Ohio, and total U.S. natural gas extraction was near historic highs. The reason was because the pipeline infrastructure to bring natural gas into New England was already operating near full capacity, and didn’t have room to accommodate the region’s additional needs. As natural gas prices surged, some power plants were forced to shut down for lack of fuel, while use of oil for power generation surged to eight times the region’s average in an effort to meet demand.
As natural gas prices surged, some power plants were forced to shut down for lack of fuel, while use of oil for power generation surged to eight times the region’s average in an effort to meet demand.
Last winter, natural gas demand in the northeast states reached record highs, even though there were no meaningful changes in pipeline capacity. Power providers learned their lesson, and stockpiled fuel in advance, and New England’s power grid operator provided incentives for generators to lock in oil and gas supplies early. Low temperatures are expected to reduce risk of a fuel shortage this year, and consumers will benefit from lower winter energy bills overall. EIA projects that in its base case forecast, heating oil bills will be 25 percent below 2014, natural gas bills will fall by 10 percent, and propane bills will be 18 percent lower, if current weather forecasts are correct. But this will have a knock-on effect for energy companies, and the lack of a winter demand surge could create challenges for struggling oil and gas producers.
This week, oil prices have treaded into terrifying territory: The $30 range. Experts have walked back from expectations that oil prices would see a swift rebound this year or next as U.S. oil production remained resilient in 2016, and the global oil supply glut drags on. Last week, the International Energy Agency announced a new estimate that even in its reference case scenario, oil prices wouldn’t return to above $80 per barrel until 2020—despite the fact that many forms of oil production are uneconomical at sustained low oil prices.
That’s not to say that shale oil supply hasn’t suffered. According to EIA, from March through October 2015, oil production in the Lower 48 onshore fell slightly from 7.6 mbd to 7.1 mbd, and there’s no doubt that producers are hurting. But in recent months, some banks and other analysts have argued that prices need to drop into the $30 range and stay there for major bankruptcies and consolidations to occur, and for U.S. shale oil production to meaningfully decline. This winter might be the time when many of the struggling independent oil producers are pushed over the edge by the continued decline in oil prices, while others survive by continuing to trim capital spending.
Gas standoff between Russia and Ukraine
Russia and Ukraine’s conflicts throughout 2014 continued into winter last year, as Russia demanded that Ukraine pay its overdue gas bills, and threatened repeatedly to cut off supplies. In July of 2015, Russia officially ceased supplying gas to Ukraine. Ukraine was able to cover its summer gas demand through its own production and imports from the European Union, but there was great concern that the country would face immense challenges if Russian energy supplies were not resumed before winter. Following months of talks arbitered by the European Union, the two countries came to an agreement in September that Russia would provide gas supplies to Ukraine through March 2016, at a discounted rate that would be reevaluated on a quarterly basis. But Russia is a notoriously unreliable player, and while officials are optimistic that the agreement might help prevent an energy security crisis, much uncertainty remains about if the deal will stick. Fortunately, Ukraine has also stockpiled over 14 billion cubic meters of natural gas, which will help buffer against shortages.