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Xactanalysis Insights and PCS

Below normal heating demand season predicted this winter


It looks like the U.S. is heading for another ‘warmer than average’ winter in the 2012/2013 heating demand season, according to a forecast from MDA EarthSat Weather, a consulting group for weather risk and commodity weather products and services. Their seasonal winter outlook covering December 2012 to February 2013 predicts that the season will average warmer than the 30-year temperature normal (1981-2010) as a whole.

This has an impact on many firms whose businesses are affected by temperature, particularly energy firms. With heating demand predicted to be lower than average, based upon Gas Weighted Heating Degree Days (GWHDDs), it’s likely that an uptick in demand for weather derivatives and insurance contracts which pay out based on temperature measurements will be seen.

The forecast from MDA EarthSat Weather predicts 2555 GWHDDs for the season, which falls slightly below the 30-year normal (2585) and 10-year normal (2588). MDA expect the warmest anomalies to exist across the north-central U.S. and a more seasonal outlook across the south.

“While we’re favoring a warmer than normal winter with decreased heating demand, it’s unlikely that we’ll see a repeat of last winter’s record warmth,” said Bob Haas, Weather Operations Manager at MDA EarthSat. “There are still some downside risks that need to be monitored as the season approaches such as the potential for blocking in the upper latitudes which can drive additional cool air south into the U.S..”

Forecast indicators used in this outlook by MDA include: a weak to moderate El Nino Southern Oscillation (ENSO), an ongoing negative Pacific Decadal Oscillation (-PDO), and a positive Atlantic Multidecadal Oscillation (+AMO). Other factors such as upper latitude blocking, which can turn the forecast colder at times, will need to be monitored as the season nears says MDA.

In terms of precipitation, another factor which can be hedged with weather derivatives and insurance, the Southwest, Interior West, Midwest, and much of the Northeast are expected to average drier than normal while Texas and the Plains look to run above normal. The Southeast, Mid-Atlantic, and Pacific Northwest should remain near normal according to the forecast.

In summary, the outlook based on GWHDDs for the winter of 2012-2013 is expected to be:

  • Warmer than the 10-yr and 30-year normal (2555 GWHDDS as compared to the 30-year 2585 and 10-year 2588)
  • Cooler than the record breaking warmth during the 2011-2012 winter season (2279 GWHDDs)
  • Warmest early in the season with cooler trends arriving late

It’s important for energy companies across the U.S. to keep abreast of weather forecasts predicting heating demand. By getting advance warning of seasons where heating demand is predicted to be low, energy firms can purchase weather derivatives which can help to compensate them for lost revenue from reduced heating demand. As we wrote last year, weather variability can cost the U.S. economy as much as $485 billion per year.

We wrote about a great example of this last year when Just Energy Group hedged against excessive winter warmth successfully.

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