Which Winter Month Is Weather Most Volatile?
Yesterday we wrote about the role of a couple of atmospheric indicators clouding winter forecasts. Today we have continued to dig deeper into the winter forecast data that we will be integrating into our Weekly Climate Updates over the coming months for clients. As we integrated in the latest Utility Gas Heating Degree Days, we decided to run tests to determine when in winter we would expect traders to care most about weather. First, we simply looked at which month had the most UGHDDs on average since 1985, which, unsurprisingly, was January.
What may be lesser known is that December, on average, holds a decent number more than February, with March holding a decent number more than March. However, we didn't feel that just sheer number of UGHDDs would tell the story. If there were a month where on average there were slightly fewer UGHDDs but the year-to-year number could shift wildly, then that would seem to have more ramifications for how weather forecasts would impact energy demand expectations and prices. We opted to find the standard deviation of UGHDDs for each month since 1985, and the results indicated that it was December, not January, that heating demand has been most volatile.
Though January holds the most heating demand, in December it is most volatile, followed then by January, February, March, and finally (far lower) November. We were interested to see if this trend carried over into the natural gas market, as around half of the homes in the US are heated by natural gas (and over another third use electricity, of which natural gas has increasingly been burned to generate). Sure enough, similar trends persisted, with December holding the largest standard deviation in monthly natural gas price movement.
January came next, as expected, but then was followed by November, presumably as traders still have an entire winter of heating demand ahead of them to speculate on. Either way, the message is clear: those in the energy markets better keep a close eye on weather forecasts for December.
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