It was the coldest day of this winter season in Houston and much of rest of the U.S. yesterday, and the cold blast was met with a new record price for natural gas — January natural-gas futures hit an all-time high of $15.10 a million British thermal units on the New York Mercantile Exchange and then settled at a record high of $14.994 a million British thermal units.
Although damage to production facilities from the hurricanes earlier this year reduced available supplies of natural gas, the impetus for the current spike is cold weather. Although November was a relatively warm month, December is shaping up to be bitterly cold as weather futures on the Chicago Mercantile Exchange predict that December will be almost 25% colder than normal in Chicago and New York. What is even more remarkable is that the spike in natural gas prices isn’t bigger news than it is. Until the prior spike hike after hurricanes earlier this year, gas futures had rarely risen above the $10 a million BTU level and industry players thought a price of $15 was analogous to $100-a-barrel oil prices. Interesting how perceptions quickly change as people adjust to changing market conditions.
Houston's Clear Thinkers
Longtime Houston attorney Tom Kirkendall's observations on developments in law, business, medicine, culture, sports, and other matters of general interest to the Houston business, professional, and academic communities.
“December is shaping up to be bitterly cold as weather futures on the Chicago Mercantile Exchange predict that December will be almost 25% colder than normal in Chicago and New York.”
Now, I’m as big a fan of statistics as the next guy, but that one got me. How does Chicago get 25% colder? We would first have to quantify cold, wouldn’t we? Now, I’m a wimp compared to your average Chicagoan, so cold probably means two different things to each of us. For instance, in Houston, it is cold whenever the temperature drops below 60 degrees. But, in Chicago, it is probably not officially cold until it reaches freezing (but, I bet I can stand in downtown Houston in a suit in August without sweating before they do). Then you have to figure out what normal cold is so that you then can calculate “25% colder”. Suppose the average temperature is 20 degrees. Does that make “25% colder” 3 degrees (32-20*.25=3)?
I decided to go to weatherunderground.com for help. There, right on the screen is a term called “heating degree days”. Now, I don’t know what these are, but it says that yeaterday Chicago used 48 of them. Eureka! Could this be it? I decided to test my theory. I clicked on the weather for December 8, 2004. Sure enough, there it was. Only 25 heating degree days! It IS colder this year! But the futures market is wrong. Based on my research, it is going to be 92 PERCENT COLDER in Chicago this year!
Now, if you’ll excuse me, I must return to my Captain Morgan and Coke.