Winter weather forecasts can be a useful tool for predicting seasonal trends, but it's important to recognize that they come with inherent uncertainties. Even if a forecast like NOAA’s calls for above-average temperatures, various factors could still lead to unexpected price increases in electricity and natural gas markets. Here, we’ll break down some of the variables that might affect winter conditions, heating demand, and ultimately, energy prices—especially during periods of colder weather.
Forecast Accuracy: A Mixed Bag
NOAA’s current forecast suggests above-average temperatures for the winter season, but forecasts like these can sometimes miss the mark. While this outlook may hold true, there have been instances where the predictions diverge significantly from actual conditions. These forecasts are based on average conditions over several months, meaning short-lived but intense cold spells can still occur, leading to increased heating demand and prices, even during a generally mild winter.
Source: NOAA
To evaluate how well these predictions hold up, NOAA uses the Heidke Skill Score, which ranges from -50 (worst) to 100 (perfect). For example, the winter of 2020-2021 scored -17.89, reflecting poor accuracy, while last year’s forecast earned a score of 51.29, one of the better results over the twenty years. These scores highlight that forecasting is inherently uncertain, and deviations from the expected outlook can impact energy markets.
Source: NOAA
With that in mind, several factors could still alter this winter’s current forecast, potentially leading to colder conditions and increased energy demand.
Key Weather Factors: La Niña, Siberian Snowpack, and the Polar Vortex
Several weather dynamics could create the potential for colder conditions this winter, even if the overall trend is warmer:
La Niña’s Influence: This year’s weak La Niña pattern could allow more moisture to move along the jet stream over the Midwest, Mid-Atlantic, and Northeast, potentially leading to more winter storms. If these storms bring more snowfall, it can create a colder scenario as snow cover traps colder air, especially at night, raising heating demand.
Siberian Snowpack: October 2024 has seen a deeper and more expansive Siberian snowpack compared to last year. This factor often correlates with colder air over Canada, which can spill southward into the U.S. While La Niña’s jet stream might limit this, any leakage of cold air could still impact North American temperatures.
Polar Vortex Dynamics: Unlike last year’s strong polar vortex, which kept cold air confined near the North Pole, this winter’s vortex is expected to be weaker. This increases the chances of cold air escaping into southern latitudes, potentially resulting in sudden temperature drops. These dips can raise heating demand, even if the broader trend is toward warmer weather.
Pricing Risks: How Colder Weather Impacts Electricity and Natural Gas Markets
Colder weather is closely linked to increased heating demand, leading to higher prices for both electricity and natural gas. As temperatures drop, heating degree days—a measure of the demand for energy needed to heat a building—increase, driving up demand. This pattern can be seen in price trends from past winters, where even brief cold snaps have led to notable price surges.
The chart below represents heating degree days, with callouts showing settled prices for New York City over the past two winters. As illustrated, heating degree days and prices rise during periods of extreme cold. It should also be noted that the draw from natural gas inventories when temperatures drop can be substantial. For example, during last winter’s single major cold spell, approximately 350 billion cubic feet (Bcf) of natural gas was withdrawn from storage in a short period. If this winter brings three or four similar cold spells, withdrawals could total exceed 1,000 Bcf in just those periods. This scenario could strain storage levels and push up natural gas prices, even if average seasonal temperatures remain warmer than usual.
Preparing for Winter's Pricing Risks
While forecasts like NOAA’s might guide expectations, the possibility of cold snaps presents a potential challenge for electricity and natural gas users. Even a forecast that proves accurate in terms of overall seasonal averages can be affected by sudden periods of intense cold, driving up prices. The deeper Siberian snowpack and a weaker polar vortex this year increase the chance of colder conditions, making it prudent for end users to plan for potential price volatility.
Understanding these dynamics can help end users better prepare for the upcoming winter. By keeping an eye on the factors driving sudden changes in demand, businesses can take steps to mitigate the risks associated with colder-than-expected conditions, ensuring they’re not caught off guard by market shifts.
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