Godzilla El Nino to Bring Record Rain and Heat

….and now for the weather:

While El Nino weather conditions may be less consequential to the stock market or the economy as a whole, we present here a fundamental forecast discussion along with some technical analysis that may factor into crop prices and energy markets over the next year. Lower crop prices this fall and lower Heating Oil prices into February may lead to peak prices next summer. El Nino (the boy) refers to a portion of a climate cycle that is characterized by warmer than normal waters and lower than normal air pressure in the eastern Pacific ocean. La Nina (the little girl) is just the opposite. While the sample size database after 65 years is still quite small, the ebb and flow from hot to cold moves to extremes about once a decade with most extreme El Nino’s followed by the cool extreme of La Nina about a year later. El Nino’s ocean temperatures of consequence usually peak in the November – January time frame. Consequently, a strong end of 2015 warm water climax in the eastern Pacific is expected over the next couple of months given the current progression of ocean temperatures near the equator and weakening trade winds. The hallmarks of an El Nino are notable in the US winter for cool and wet conditions in southern California and lower tier of the US, while the northern US should experience a warmer and drier winter – welcome news for the East coast after the snowmageddon back in January. As in 1998, forecasters expect unusual heat waves during the summer of 2016 to follow the warm winter.

El Niño

The confidence is high that the current 2015 warming pattern vs previous record extremes from 1982 and 1997 (shown below) will continue and either match or exceed modern records. Should this pattern continue on the current course, the warmer than normal winter will exacerbate the seasonal weakness in Crude Oil, Heating Oil, Natural Gas and Unleaded Gas due to reduced energy needs during a warmer than normal winter season that typically bottoms in February. Crop prices typically bottom in El Nino years during late summer – early Fall followed by a warming peak with rising crop prices into the May – September time frame following the ocean temperature climax. 

El Niño  pattern

Energy

Global Oil consumption grew 1.9 million barrels a day (mbd) over the past year while global Oil supply grew 2.6 mbd. Many may feel this surplus of Oil is about to move back to parity assuming that low Oil prices cause reduced drilling rig counts and supplies while consumption continues to grow by 1.2 to 1.4 mbd next year. In fact the US – as widely expected – has reversed its rapid expansion of Oil production and has shown signs of reduced supplies. However: 1) The current US Oil output reduction is a miniscule 4% from its recent peak and 2015 will definitely register a new record production level on an annual basis. 2) Russia and OPEC members are starved for cash and will try to keep or even expand their output. The current 0.3 mbd fall in US output is already being replaced by Iran and OPEC. 3) Forced alternative energy measures continue to shift demand away from Oil consumption.

Iran: On the supply front there is no doubt OPEC and other failed autocracies that produce oil will pump as much as possible for their own national security. Iran as we have mentioned is on the verge of a production surge while it spends lavishly on importing services and technology to revive its antiquated energy infrastructure. A 1 to 1.5 mbd increase from Iran over the next year or 2 is likely.

Iran Oil supply 10-15

Russia: US and European sanctions upon the Russian energy sector and a crash in oil prices have failed to shrink Russia’s energy output. In fact, even with shrinking extraction rates from aging oil wells Russia has reached record production levels. While it will be very difficult for Russia to sustain such a high oil and gas output, it’s quite predictable that such a dictatorship would be able to beat mainstream forecasts whom expected lower yields since its economy relies so heavily upon energy exports. Putin has felt the pain in lower revenues and may have shifted Billions of Russian Treasury holdings outside of US banks into Belgium prior to Crimea/Ukraine invasions to spend in 2015 as he anticipated economic sanctions. Don’t be surprised if Putin also has an ulterior motive for sending his military into Syria, aside from propping up the Syrian Dictator Assad. Currently Russia is in excellent position to secure an alliance with Syria, Iran, Iraq and Yemen. Quelling Sunni and ISIS insurgents in these countries would allow Russia to use his proxies to ring fence and even attack Saudi Arabia sending Oil prices to new records. We have not heard of any analysts calling for such a scenario and something of that magnitude may take months if not years to manifest. Yet it’s something to be mindful of as the US continues its 7 years of retreat from geopolitical conflict creating a petri dish of abundant radicalism and chaos to rise up.

Russia Crude Oil Production

While the fundamental supply over demand Oil imbalance may continue into 2016 there are technical signs of a bottom in coming months. In addition to seasonal lows due in the 1st quarter of 2016 we would note that Natural Gas is approaching historic price lows in the $2.50 – $2.00 range while managed money and large spec commitments are at record lows revealing extreme liquidation and negative sentiment. It’s unlikely prices can sustain an uptrend without news of a trigger from Islamic violence, a stronger global economy or climate & seasonal influences, but such extremes imply that the current downdraft may be part a final leg lower before prices stabilize. OPEC and Russia need chaos and supply fears soon to refill their empty coffers with blood money to defend against internal strife and anarchy. 

Nat Gas 10-15

Heating Oil, like Natural Gas, has also exhibited extreme negative sentiment back in the 1st quarter and more recently by the short positions of managed money accounts. There is room for another run lower fueled in part by a warm El Nino winter into the typical February low. Should Commercial holders move back to extreme positive inventories of Heating Oil while Large Specs move back to extreme negative liquidation levels reached in April, then a longer term low may arrive here as well as Natural Gas.

Heat Oil Oct 2015

All fossil fuels will essentially move in unison, thus still lower prices are ahead possibly into January 2016. A few months ago we began talking about a new decline to $2 a gallon at your local pump by year end. Many parts of the country are already well below $2. The national averages lags a few weeks but we suspect EPA refinery regulations have impeded the price realization on the west coast by restricting refineries converting Oil to Gasoline. Politics are a factor here, but we have no doubt the free markets will keep trying to push prices lower until the fundamentals become more Bullish. 

Gas Buddy 10-15

 

While gasoline prices at the pump nationwide keep falling closer to our $2 year end expectation, we can see below that the untaxed raw national gasoline price is already testing its price low from last January. Earlier this the US average price for gas reached $2 ($1.60 in areas) and according to the the chart below we should be witnessing even cheaper gas in our pocketbook already when comparing previous price lows. While the EPA works to inhibit supplies, the current slide in prices this week hints at cheaper energy prices before seasonal lows arrive in early 2016.

Gasoline weekly 10-15

 

Crop Prices Await El Nino

Typical extreme El Nino years witness low crop prices during the growing season prior to the East Pacific Ocean temperature peak. So far this unusually cool 2015 summer in the midwest provided fantastic growing conditions and low crop prices due to high yields. In addition a severely depreciating Brazilian Real currency has created more competitive Brazilian exports with lower Soybean prices during this current harvest period. These low prices have also set up the 2016 growing season for higher prices should the El Nino heat wave arrive next summer. Look for an unusually warm winter in the northern half of the country and heavy southern California rains as a clue for what might be ahead in 2016.

Soybeans weekly 10-15

 

The chart above shows an 18  month Soybean downtrend still in force. Large Specs reached extreme negative net short positions near $9 twice over the past year coinciding with significant price lows followed by strong 2 month rallies. With prices below $9 today we will be watching for either a series of higher highs to mark a bottom or Large Specs reaching another extreme Selling level along with sub-$8.50 Beans for a possible major price bottom. With the potential for an El Nino heat wave in 2016 we should be vigilant for Corn, Oats, Beans and Wheat reaching Large Spec selling extremes for investors to begin buying the ensuing uptrend.

If Solar minimums overwhelm El Nino heating with an icy winter then the 2016 agriculture Bull markets may be premature. Should winter become as bitter as the past 2 years and the CA drought continues, then heat up the drinks and enjoy your winter skiing.

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