Will La Nina save natural gas?

Oil and natural gas prices remain in the doldrums, and the odds of an immediate turnaround look long indeed. But with these volatile markets, you can never say never. And while unlikely in the short term, there are a couple of wild card factors that could give energy markets a lift later this year.

Natural Gas: La Niña to the Rescue?

The price of benchmark natural gas futures fell to $1.75 per million British thermal units (MMBtu) in December, the lowest level since 1999. (No, that’s not a typo. The last time natural gas was that cheap, Bill Clinton was president and no one had ever heard of a smartphone.) Gas prices have been hammered by the climate phenomenon known as El Niño, a marked warming of the Pacific Ocean that often brings unseasonably mild winter weather to much of the eastern U.S.

El Niño showed up in a big way this season. Christmas Day in the nation’s capital saw temperatures flirting with 70 degrees, for instance. And that meant that demand for natural gas (which heats half of homes in the U.S.) all but disappeared. And now, even with colder weather in place and a crippling snowstorm hitting the Mid-Atlantic, gas prices haven’t rebounded much. Heating demand is up, but not enough to really dent the massive stockpiles of gas that built up during winter’s warm start.

So while we don’t expect gas prices to retest their December lows, we also don’t see much upward momentum yet. At $2.21 per MMBtu now, the benchmark gas price could creep up to about $2.50 if the latter half of the winter turns out to be chilly. That’s still painfully low for gas producers.

To mount a real rally, the gas market is going to need some help from Mother Nature, in the form of heat, not cold. Specifically, a switch from El Niño to La Niña could do the trick.

Why La Niña? The opposite effect of El Niño, La Niña involves a cooling of Pacific waters that can cause warmer-than-average summer temperatures in the U.S. For instance, the last La Niña cycle, which ran from 2010 to 2012, coincided with three consecutive scorching summers. And hot summers mean soaring electricity demand as homes and businesses across the country rev up their air conditioners.

There’s no telling what the weather will be like in six months. But some signs are starting to point toward a switch from El Niño to La Niña. Australia’s Bureau of Meteorology, for instance, says El Niño is already waning, and that there’s a 50-50 chance of La Niña taking hold later this year.

A hot summer would be sure to give gas prices a jolt. Now more than ever, U.S. power generation depends on gas as a fuel. As we’ve noted before, coal’s role in powering the grid is shrinking, and gas is filling the gap. The Department of Energy reports that, since January 1, the electric sector’s gas usage is at an all-time high, rising further from the annual record set in 2015. And unlike in previous winters, when severe cold caused power demand to rise, the temperatures this year have been fairly typical. That means demand is rising for the simple reason that coal-fired power plants are shutting down and gas-fired units are taking their place.

A summer heat wave would cause gas consumption by utilities to soar to even higher records. That would whittle down gas stockpiles and give traders a reason to bet on higher prices. At the same time, demand for U.S. gas will be heating up abroad. The DOE figures that America, long a net importer of gas, will flip to a net exporter by the middle of 2017, thanks to increasing sales to Mexico via pipeline and the beginning of shipments of liquefied gas to markets such as Europe and Asia.

With weather trends, there’s never any certainty. But if you’re looking for a scenario in which natural gas prices finally climb out of the basement, La Niña looks like your best bet.

Oil: The Geopolitical Angle

Perhaps the most remarkable aspect about crude oil’s price tumble is the fact that it took place amid tremendous chaos in the Middle East. Syria’s civil war rages on unabated, as does Libya’s. ISIS continues to control vast swaths of territory. Iran and Saudi Arabia are rattling their sabers at each other across the Persian Gulf. And yet, nothing seems to scare oil markets enough to give prices a lift.

But how long can the lull in geopolitical risk last? Every major oil exporting nation is hurting from the drop in crude prices from nearly $100 per barrel to $30 per barrel. From Russia to Brazil, the economic pain is palpable. Venezuela is facing outright economic collapse, with inflation in triple digits.

So far, OPEC and other big exporters have failed to agree on output cuts needed to bring balance to an oversupplied world oil market. We’ve noted before that such a coordinated response will be very difficult to pull off.

Perhaps the pain is finally getting bad enough to galvanize OPEC to act. The cartel’s secretary-general, Abdalla Salem el-Badri, said recently in a speech in London that the world’s oil exporters need to coordinate a production cut in order to stabilize prices and ensure sufficiently high prices to finance the drilling needed to meet future crude demand.

Ultimately, the group’s de facto leader, Saudi Arabia, would have to approve such a strategy. And the Saudis have been reluctant so far to cut unless other exporters join them. Which is why it’s noteworthy that Leonid Fedun, vice president of Russian oil giant Lukoil, said in comments to news agency Tass that Russia would be open to a coordinated supply cut. Russia is the world’s largest crude producer, so its cooperation in any such strategy would be crucial.

We wouldn’t bet on this scenario just yet. But we might if and when oil prices take their next tumble. A drop from $31 per barrel to, say $25 or $20 would probably focus a lot of minds in Riyadh, Moscow and other petro capitals.