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Above average temperatures to continue across U.S., good news for some weather derivatives traders


We wrote last week that some weather traders are taking advantage of the recent heat wave across the U.S. to profit from making the right choices with their weather derivative contract purchases. The high temperatures caused some weather derivative contract prices to soar on the Chicago Mercantile Exchange (CME) allowing traders to cash in.

Now weather forecaster Weather Services International (WSI) have published a report showing that they expect the warmer than average temperatures trend to continue through the rest of the summer and transition into a very warm autumn. They expect the summer period of August-October to feature significantly above average temperatures across all of the U.S. apart from some Pacific Coast states and Florida.

“The summer heat has been more impressive and widespread than anticipated so far,” said WSI Chief Meteorologist Dr. Todd Crawford. “The extreme drought across the southern Plains has resulted in record heat in that part of the country. The drought has also acted to anchor the heat across much of the eastern two-thirds of the country, while the West has remained relatively cool, so far. We don’t foresee a significant change in pattern for the remainder of the summer, although the focus of the heat may shift slightly farther to the west in August. As we progress into fall, the pattern will generally be driven by the northern Pacific Ocean signal, which strongly argues for very warm temperatures across much of the eastern two-thirds of the US, especially in the north-central and northeastern states.”

WSI predict that for the August-October period there will be 587 population-weighted cooling-degree days, much higher than the 1971-2000 average of 498 but slightly lower than last years 603. For weather derivatives traders each cooling-degree day point above average can be worth as much as $20 per contract held meaning some will profit this year. Other users of weather derivatives such as power companies are likely to profit more than normal from their weather hedging activities, which (in the case of power generation) they may use to cover the risk of higher than normal temperatures meaning greater than normal electricity consumption for air conditioning, or lower than normal consumption for heating. In this way weather derivatives can act as a hedge or type of insurance cover.

WSI predict that regional U.S. temperatures will be as follows for August, September and October:

Northeast – Warmer than normal
Southeast – Warmer than normal, except Florida
N Central – Warmer than normal
S Central – Warmer than normal
Northwest – Cooler than normal
Southwest – Warmer than normal, except coastal CA

Read the full details from WSI here.

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