February 19, 2025 • 26 mins
Little connects the natural world to our lives more tangibly than the weather. Weather impacts everything from food to energy production, and shifting weather patterns have the power to shift the economy. From wind droughts to heatwaves, utilities and commodities traders are seeking a better understanding of how enhanced weather modeling could help them predict the future. On today’s show, Dana Perkins is joined by BNEF weather analysts, Jess Hicks and Willa Tobin, to discuss their recent research notes “Weather and Commodities - Nine Things to Watch in 2025” and “Shifting Weather Patterns: A Black Swan for US Commodities”.
Complementary BNEF research on the trends driving the transition to a lower-carbon economy can be found at BNEF<GO> on the Bloomberg Terminal or on bnef.com
Links to research notes from this episode:
Weather and Commodities - Nine Things to Watch in 2025 - https://www.bnef.com/insights/35719
Shifting Weather Patterns: A Black Swan for US Commodities - https://www.bnef.com/insights/35305
See omnystudio.com/listener for privacy information.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
This is Dana Perkins and you're listening to Switched on,
the podcast brought to you by B and EF. And
today we're here to talk about the weather. While I
won't be able to tell you whether or not to
grab a coat on your way out of the house,
today we will go through some important definitions when it
comes to the weather. We'll explain the difference between weather
and climate and why it can be hard to draw
straight line between natural disasters like fires and hurricanes and
(00:23):
climate change. We'll also highlight why B and EF's meteorologists
are some of my colleagues who work with the widest
range of teams across BNF. Weather impacts so many things,
from power prices to natural gas stores to emissions, so
it's no surprise that many companies, especially utilities, are looking
at temperature, wind, rain and everything else that goes into
(00:46):
seasonal weather. As we head into another cyclical La Nina period,
what does this mean for the year ahead? Today I'm
joined by B and EF's resident meteorologists and weather analysts
Jess Hicks and Willetobin, and they share findings from their
recently published research notes titled Weather and Commodities. Nine Things
to Watch in twenty twenty five and shifting weather patterns
(01:07):
a black swan for US commodities B and EF Clients
will be able to find both of these at BNF
go on the Bloomberg Terminal or at BNF dot com.
Right now, let's talk about the weather. Jess, thank you
(01:29):
very much for coming on the show today. Thank you
for having me and Willa. Good to have you here
as well.
Speaker 2 (01:34):
Yeah, thank you, Dana.
Speaker 1 (01:35):
So we're here to talk about the weather, and I
will tell you right now, I'm not going to tell
you what the weather's like here because I'm recording from
London and it's the same way it is every February,
so we'll just leave it at that. Gray is the theme.
But actually I wanted to be a meteorologist as a kid,
so I'm very much looking forward to this. Ten year
old me cannot believe that my job is to sit
(01:56):
here and interview the two of you. And actually, you know,
I'm not going to tell you how old I am either,
but the now me is also really excited. So as
we talk about the weather, so much of our conversation
in this studio and on this show revolves around climate
and emissions targets, can we have a quick definition at
the beginning to frame our conversation about the weather and
(02:16):
create that distinction between weather and climate.
Speaker 2 (02:19):
Sure, So the difference between weather and climate really boils
down to time horizons. Weather is technically defined as the
state of the atmosphere at a given point in time,
which can be measured by things like temperature and wind
speed and pressures. Whereas climate, on the other hand, is
a long term average of atmospheric conditions for a region.
So this is going to be more of like your
thirty year averages of those types of conditions, and so
(02:43):
we can think of about that as like the thirty
year average of winter temperatures.
Speaker 1 (02:47):
Now, other than the fact that I'm really enthusiastic about
this topic, why is it that we at bn EF,
who are so focused on the energy transition are researching
this now?
Speaker 3 (02:56):
So the reason why weather is so important and why
we're researching it is because it's a fundamental part of
our lives. It impacts things as simple as what you
wear every day to things as complicated as the net
zero energy transition. Weather drives these residential and commercial power
demands through heating and cooling needs, but it also fuels
renewable power generation for wind and solar, and can disrupt
(03:19):
production and transportation of oil and gas with any extreme
weather event that hits. So these are just a few
items that come to my mind when I'm thinking about
how weather has an impact. At BNF, as meteorologists, we're
looking at short term weather forecast paired with past weather
data to achieve insights on any impacts for power and
energy sectors. So when we're monitoring weather, it's important not
(03:41):
to just look at what's happening right here now, but
also compare it to the historical averages, so create those
moving baselines and understanding how the weather is changing with time,
so that gives us an insight as to how extreme
a potential shift or a potential upsetted trend can be.
So one example of this in the EU. I've been
(04:04):
keeping an eye on wind speeds in Europe this winter
and we're seeing quite the hit to wind generation in Germany.
And when this hits, there's a massive decrease in wind
power generation and we're seeing this increasingly frequent, especially in Europe.
And then will if you have an example in the US.
Speaker 2 (04:22):
Yeah, So for US weather, I've been interested in how
extreme weather is impacting physical infrastructure for the US. So
most recently I looked at how the LA wildfires were
impacting power transmission lines. But then back in the fall
during hurricane season, I was also monitoring which oil and
gas platforms in the Gulf of Mexico were in swaths
of hurricanes.
Speaker 1 (04:42):
So we're going to talk about what some of these
extreme weather events actually are, and you'd already highlighted a
couple of them, but before we get there, I want
to have a better understanding of actually what data as
meteorologists you call upon to really formulate your research, and
you know, what information does one need in order to
start assessing this space.
Speaker 3 (05:02):
Absolutely, just to start things off, weather is a dynamic
beast to wrangle and there's a lot going on in
terms of what a meteorologist needs to monitor, so it's
important to use as much data as possible. Quite a
bit of this comes in the form of global forecast
models such as GFS, which is the Global Forecasting System
and ECMWF, the European Center for Medium Range Weather Forecasts.
(05:26):
What these offer our forecast data on temperature, precipitation, wind speeds,
cooling and warming, degree days, and even more and so
we have access to this as well as historically recorded
weather data, and at BNF we have access to two
thousand stations globally, so we can call upon this to
(05:47):
create baseline comparisons with upcoming forecast data, and this helps
us understand how abnormal and upcoming weather event will be.
There is also something we monitor called teleconnections. These are
significant relationships. There are links between weather phenomena at wildly
separated locations on Earth. Again a very technical description of
(06:07):
what a teleconnection is. It's basically different atmospheric patterns around
the world, and one you might be familiar with is Enzo,
the El Nino Southern oscillation, which houses El Nino and
La Nina.
Speaker 1 (06:19):
So that begs the question what is El Nino and
La Nina? Because I certainly remember talking about this growing up,
where you would see these periods of extreme rain and
in California, it was part of our regular lexicon. But
now I find everybody around the world is throwing these
terms around, and it seems like every year seems to
fall into one of these two categories, which I know
(06:40):
surely cannot be the case. So can you talk to
us a little bit about First of all, what one
is versus the other, and the frequency and duration.
Speaker 2 (06:47):
So and so. It is a multi year cycle of
atmospheric patterns. It actually has three phases, which would be
El Nino, La Nina, and the neutral phase. At the
most basic level, El Nino and La Nina are warm
and cold sea surface temperature anomalies. For a section of
the Equatorial Pacific. We are currently in a La Nina,
which is the cold phase of the cycle, but this
(07:09):
does not necessarily mean that the entire globe is colder
than normal. A typical La Nina year will bring wetter
weather to the western Equatorial Pacific, northern Brazil and the
Pacific Northwest for the US, and drier conditions to the
southern US and northeast China. Regional temperature shifts also become apparent,
with warmer conditions across the southern US and cooler conditions
(07:31):
in the US, Pacific Northwest, and on the west coast
of South America. El Nino is one of the oldest
known teleconnection patterns. It was actually first discovered in the
fifteen hundreds by Peruvian fishermen who noticed the periods of
warmer water in the Pacific, bringing fewer fish to their
nets around December, so they named it El Nino due
to the proximity to the birth of Christ in the
(07:51):
Christian religion. So since then there has been extensive research
into this phenomenon that now is a key factor in
our seasonal forecasting. Scientists have also discovered other similar atmospheric
patterns that inform our seasonal outlooks, such as the North
Atlantic oscillation. This pattern is a sea sawing of high
and low pressures in Iceland and the Azores and has
(08:12):
trended more positive over the last three months, bringing warmer
than average temperatures to Europe. Understanding these patterns can give
us clues as to what weather we can expect in
the coming months. While our seasonal forecasts are not yet
accurate enough to tell you how much snow your ski
resort is going to have in the three months prior
to when you were planning it, we can have an
idea of how much above or below normal temperatures and
(08:33):
precipitation will be at a regional level. So this is
really important for our energy storage levels and traders. If
the US is expecting winter temperatures to be mild with
above normal precipitation, this could lead to low gas withdrawals
from a lack of heating demand and bolstering conventional hydroelectric
reservoirs leading to an increase in renewable power generation.
Speaker 3 (08:54):
And another quick anecdote for Europe with the impact that
the North Atlantic Oscillation has. We're seeing the presence of
this this year with Lanina. So, like Willis said, in
Europe during a Lanina, we'll normally see cooler than average conditions,
but this year we've actually seen warmer than average conditions,
(09:14):
and that's because the North Atlantic Oscillation has swung into
a positive phase. So this positive phase is dominating over Lanninia,
creating that warmer than average condition in Europe. These trends
are really important to watch for liquid natural gas usage.
Speaker 1 (09:30):
And I love that you brought up the LNG part
of this because this features really heavily as we do
at b and EF twice a year, this winter gas
Outlook and Summer gas Outlook, and look at the level
of storage that we have in various parts of the world,
and as traders are looking to try and figure out
what those prices are going to be going forward. My
question really revolves around when you see this warmer weather
(09:51):
than one would infer you need less gas over the
course of the winter in order to get through. Does
that have or is that counterweighted and to what extent
does it count weighted by increased demand for air conditioning
on a particularly hot year, where you're entering a summer
that's going to have higher than average temperatures.
Speaker 3 (10:08):
It's something to monitor for sure. So when you're noticing
that warmer than average conditions are settling into an area,
for example, in winter, you are going to notice that
there is less energy demand. Now you and I might
not feel it. You and I might not feel that
it's warmer than average because technically the temperatures are still cool,
(10:28):
but the markets will feel it, and that's going to
be the interesting thing.
Speaker 1 (10:32):
Do you work closely with the gas team as a result.
Speaker 3 (10:34):
Every single day? So I know for myself in London,
I'm working with every team on my floor, So whether
that be the gas team, the oil team, the wind team,
the hydro team, we're working every single day on passing
ideas to each other and staying on top of the context.
Speaker 2 (10:51):
On the US side, we've actually done some research into
how increases in summer gas demand is not enough to
offset losses in warmer winters. One of our gas analysts
in riy Kae Gonzalez put out a report called warmer
Weather low gas prices could threaten energy transitions and it
discusses how when we have warmer winters there is less
demand for gas driven heating. We are also seeing warmer summers,
(11:14):
but in those summers, the increase in power demand can
be filled by renewable energy, so that increase in power
demand is not necessarily being filled by burns in the
natural gas sector.
Speaker 1 (11:24):
So it's really clear how weather is so incredibly important
to a number of the different commodities that are covered
at BNF. What I want to know now is a
pivot to finance. When we looked at these most recent
fires that took place in southern California, insurance came up
quite often, and then also the role of reinsurance and
(11:45):
catastrophe bonds. Can you talk about some of the financial
instruments that exist and really how these interrelate with extreme
weather events.
Speaker 2 (11:54):
So catastrophe bond or a cat bond is a high
yield debt instrument designed to raise money for companies in
the insurance industry in the event of a natural disaster.
A CAT bond allows the issuer to receive funding for
the bond if the conditions are met, such as like
a tornado or a hurricane or severe flooding. If an
event that's protected by the bond activates a payout to
(12:15):
the insurance company, the obligation to pay interest and repay
the principle is either deferred or completely forgiven. So a
CAT bond has a shorter maturity date of between three
to five years, and the primary investors in the security
are like hedge funds and pensions and other institutional investors.
But on the other hand, a reinsurance is a type
of insurance primarily purchased by insurance companies to provide a
(12:39):
layer of financial protection against weather events that could cause
major financial disasters, and as we're seeing with extreme events
becoming more frequent, the market for these types of bonds
is also growing. In twenty twenty four, the US had
twenty four rather related disaster events that individually caused over
a billion dollars in damages, with seventy one percent of
(13:00):
these events attributed to severe storms. The five year average
cost of these damages in twenty twenty four was around
one hundred and fifty billion, which was more than double
what it was ten years ago. La Nina events have
been linked to more severe storms across the US, and
so this La Nina that we are currently in could
also mean increasing market chairs for these types of bonds,
(13:22):
as severe events could potentially be more frequent this year.
Speaker 1 (13:25):
And can you put the financial losses in context, because
you know, I brought up these fires in Los Angeles
and they were really an unprecedented amount of damage in
terms of financial loss. I mean, how much was it
and how does it compare to other natural disasters which
have taken place maybe also in the US.
Speaker 2 (13:43):
Yeah, so the LA fires were a really special case
of like the kind of perfect storm of bad conditions.
So it's not that these fires were necessarily the largest
fires we've seen in US history. It's more so that
they were in Los Angeles, a fairly wealthy area, and
so the the property losses were extremely large. So the
(14:03):
estimated monetary toll of the LA fires is expected to
surpass two hundred and fifty billion, which would make it
the costiest weather disaster in US history, and that is
even greater than Hurricane Katrina, which reached two hundred and
one billion, dollars in damages.
Speaker 1 (14:17):
So one of the things that the two of you
did headed into this year was great a Things to
Watch research piece where you kind of looked at the
year ahead. And I know it's very difficult, as you've outlined,
to actually predict the weather, but given your experience in
these kind of annual and multi year trends that take place,
what are some of the things that we can expect
in the year ahead.
Speaker 2 (14:38):
Yeah, So for the coming year in twenty twenty five,
we are seeing above average fire conditions forecasted for Texas.
This is coming from the National Interagency Fire Center, which
issues wildland fire potential outlooks, and so we're seeing these
above average fire conditions through the spring. And so this
is a combination of below average precipitation, above average winds,
(14:58):
and above average temperatures. And so from the Bloomberg Terminal,
we have these seasonal forecasts, which is showing all three
boxes are checked for Texas for the spring. But the
National Weather Service also issues temperature and precipitation outlooks for
the next twelve months, and so in those we are
seeing above average temperatures for Texas, which means that we
could see fire conditions persisting throughout the year, and so
(15:20):
the only thing that is left is an igniti event
to cause another string of devastating wildfires.
Speaker 1 (15:26):
So related to fires, but also related to the energy system,
I want to talk about precipitation and essentially water levels.
Can you make that connection spell it out for us
regarding how rainfall is actually connected to power and emissions.
Speaker 3 (15:43):
Absolutely, So I just want to preface this with we
have a focus on the US and Europe, but in
our nine Things Weather to Watch for twenty twenty five,
we took a look at China and what we're seeing
right now in China is something very interesting. So at
the end of twenty twenty four, water levels at one
of the biggest dams, actually the biggest dam in China.
Speaker 1 (16:05):
Is it the three Gorgeous Dam.
Speaker 3 (16:06):
Three Gorgeous Dam, the water levels measured four meters below
the five year average. Now, this doesn't sound like a lot,
but thirteen southern Chinese provinces in the last six months
have undergone drought warnings. Thankfully though, La Nina is bringing
a much needed reprieve to this area. So I've been
(16:27):
monitoring the weather reports and right now in some areas
of southern China. They're registering sixteen millimeters above the average.
It has relieved the drought stress on any hydropower plants
in southern China along the Yansee River. But this drought
scare has revitalized concerns over a clean, stable energy generation,
(16:51):
especially during periods of low hydropower output for the nation.
So to preface this with context, the issue began in
twenty twenty two there was an tense year long drought
and into twenty twenty three that hit the southern provinces
housing the Yangsee River. So this is the largest river
in China as a whole. This river is crucial for
hydropower and specifically Sichuan Province a key upstream province for
(17:14):
water recharge. It's also a province that makes up thirty
percent of China's hydropower. It saw water levels drop by
thirteen meters that year, so during this period, Sichuan Hydropower
actually recorded an eleven percent drop in hydro power outputs.
So the stability of the hydropower in southern China as
a power source in that area left room for concern
(17:38):
thinking about future peak energy demand, and so this short
term prioritization of coal is offering some stability for China
as they're aiming to amp up the renewable energy capacity
to meet the twenty thirty renewable targets.
Speaker 1 (17:51):
So very simply put, when you have low rainfall in
areas that are requiring hydropower to be a part of
their energy mix, they have to turn to other sources,
and in some circumstances that leads to higher emissions. So
rain level is definitely linked. Let's also talk about how
droughts connect to not just hydropower, but also to other
fuel sources like biofuels. Naturally a lot of them come
(18:11):
from sources like soybean, rape seed, So can we talk
a little bit about how there may be droughts right
now and how that's impacting the biofuels market.
Speaker 3 (18:20):
It's another interesting topic we touched upon in our nine
Things to Watch, So it's important to think about upstream
as well as downstream impacts. And I really want to
put a spotlight on Brazil and Brazil's upcoming biodiesel outlook.
There's been hurdles at nearly every turn. So brazil biodiesel
relies on that nationally grown soybean and twenty eight percent
(18:42):
of national soybean is grown in Matagrosso, so again another
spotlight on this region in Brazil. Not only was the
planting season hit with fifty six percent below average rainfall
during the first seventy five percent of that season, harvest
season is now saying delays with one hundred percent above
average rainfall, So I just want to stop one hundred
(19:02):
percent above average. So farmers are seeing floods, roads are
becoming impassable, bridges are being destroyed, on top of the
fact that farmers need to get into their fields and
harvest their crop. So what's happening here is that we're
seeing not only potential impacts on germination and a shorter
growing window early on in the crop cycle, but we're
(19:24):
also seeing moisture control issues at harvest. So this all
leads to ending production values of Brazil and soybean potentially
going down. So what will the final output be? Will
be lower than expected, and from there, how does that
impact allocation towards biodiesel on top of other uses. So
this is really important to think about when we're thinking
about Brazil's Fuel of the Future bill that was passed
(19:46):
in October twenty twenty four, and the pressure on Brazil
right now is to push the biodiesel blend and diesel
oil up to fifteen percent. So with this impact on
local soybean, what will be the impact on biodiesel.
Speaker 1 (19:59):
This here so floods, droughts that they don't just have
to do with water. So can you actually pivot now
to what impacts renewable energy wind power and what is
referred to as a wind drought.
Speaker 3 (20:11):
So these are prolonged periods of time where wind speeds
are registering two meters per second or less, and if
we look at the data that comes out of it,
the impacts are actually pretty shocking. So during an average
wind drought, if wind speeds drop by ten percent, power
generation can drop by up to thirty percent, which is
I don't know about you, but that's a pretty shocking statistic.
(20:33):
And this is becoming very important for countries whose generation
capacity is made up of a high proportion of wind.
So when periods of low wind hit, this could undercut
renewable energy output and exacerbate reliance on fossil fuels. So
right now, if we can turn our spotlight to Europe,
we're seeing a particularly striking impact in countries like Germany,
Europe's top country for wind production. So in twenty twenty
(20:57):
three and twenty twenty four there were four separate months
that Regis stirred wind rout events in Germany. Just two
of these events in twenty twenty four led to win
generation reductions of sixteen percent against the five year average,
and as a result, total German win output for twenty
twenty four fell by six percent from the previous year,
and this was despite capacity increasing three percent year over year.
(21:19):
So you can see the impact something like this can
have on a country. But how do we forecast these
It's incredibly difficult to accurately predict where wind will blow
and how strong it will be. But in Europe, low
pressure systems driven by the Gulf Stream tend to bring
weather and in this case, windier conditions. Tracking rainfall tied
to these systems in long range forecast can offer insights
(21:42):
into when wind dear weather may develop.
Speaker 1 (21:44):
So I think we've done a great job of laying
out why not only those who are covering commodities, but
financial players, companies in the energy system, anybody looking in
anything that's project power development, they are going to be
focused on actually chain changes to the weather and what
is becoming increasingly unpredictable as we extrapolate this out, and
(22:05):
we know that a change in climate leads to a
disruption in the water cycle and therefore a change in weather.
Often when you see extreme weather events, there's a debate
over whether or not you can actually link a specific
weather event to anthropogenic climate change. And I want to
understand why it is so difficult to make that connection.
(22:26):
When we zoom out, the connection seems quite obvious. But
when it comes down to a specific place and time,
why is it that there is so much debate over
tying something to a specific natural disaster.
Speaker 2 (22:37):
So I think that this question really ties back to
the definition of climate versus weather. When we're talking about weather,
we're looking at the timescale of like hours to days,
So weather changes every day, you know, like yesterday's weather
is not necessarily the same as today's. But in terms
of the climate, this is thought of to be the
typical conditions for a region during a specific time of
the year, and so when we look at climate change,
(22:59):
we can see that over the past like thirty to
fifty twelve hundred years, the weather that we are experiencing
now is not the same as it was back then.
So extreme weather has also been happening since the dawn
of time, but our methods of data collection have only
recently become quite so sophisticated.
Speaker 1 (23:15):
Delineation between averages and frequency as opposed to a specific
point in time. Where we know that extreme weather events
do happen, it's just how often and to what degree
of intensity on a global basis. That's really so we're
really ending how we began, which is this delineation between
weather and climate and what conversation each of those terms
(23:37):
is appropriated.
Speaker 2 (23:38):
Yes, and so when we talk about extreme weather, it
can be hard to link these events to climate change
just because of the infrequency in which they happen. When
you think about hurricanes, especially like a Category five storm,
those events are only maybe happening like three times a year,
and so it can be very hard to look at
a historical trend in these events when they happen so
(23:59):
infrequently and to then be able to link them to
climate change. But there has been significant research in this
area in linking the intensity of these storms to climate change.
So we know that like factors that contribute to their
intensity are increasing and have been tied to climate change,
things such as sea level temperatures and sea level rise.
And so while we can measure the factors that contribute
(24:20):
to these extreme events and lick those to climate change,
it can be hard sometimes to link the extreme event
itself because these events happen so infrequently, and since weather
has always been happening. But it's really the intensity of
these events that we are seeing as a result of
climate change.
Speaker 3 (24:35):
And so I before I was a meteorologist, I was
a paleo climatologist, which is a really fancy way of
saying I studied past climate, and when you're looking at
past levels of CO two, it pairs almost exactly with
past levels of temperature. And when we're seeing these massive
shifts upward of CO two, you see paired rises of
(24:59):
temperature over time. And what's really striking recently is that
the amount of CO two that we're seeing increase year
after year is happening at a much faster rate than
what we ever saw in paleoclimate history. And so this
is why we're seeing the impact of more extreme weather
(25:20):
tied to these increasing global temperatures, because our natural systems
aren't used to this rapid change. And so as weather
is a form of equilibrium it's trying to adjust, and
with that adjustment comes stronger, more intense storms on this occasion.
So that from my perspective, that's kind of what I'm
looking at.
Speaker 1 (25:41):
So Jess Willa, thank you for giving me even more
reasons to be checking the weather report and for sharing
some insights regarding how various climate events extreme and otherwise
are connected to our energy system and so many of
the commodities that we deal with on a daily basis
here at BNF.
Speaker 3 (25:58):
Thank you very much.
Speaker 2 (25:59):
Dana, Yeah, thank you so much for having us.
Speaker 1 (26:10):
Today's episode of Switched On was produced by Cam Gray
with production assistance from Kamala Shelling. Bloomberg NEIF is a
service provided by Bloomberg Finance LP and its affiliates. This
recording does not constitute, nor should it be construed as
investment a vice, investment recommendations, or a recommendation as to
an investment or other strategy. Bloomberg a NEIF should not
be considered as information sufficient upon which to base an
(26:32):
investment decision. Neither Bloomberg Finance LP nor any of its
affiliates makes any representation or warranty as to the accuracy
or completeness of the information contained in this recording, and
any liability as a result of this recording is expressly disclaimed.
This is Dana Perkins and you're listening to Switched on,
the podcast brought to you by B and EF. And
today we're here to talk about the weather. While I
won't be able to tell you whether or not to
grab a coat on your way out of the house,
today we will go through some important definitions when it
comes to the weather. We'll explain the difference between weather
and climate and why it can be hard to draw
straight line between natural disasters like fires and hurricanes and
(00:23):
climate change. We'll also highlight why B and EF's meteorologists
are some of my colleagues who work with the widest
range of teams across BNF. Weather impacts so many things,
from power prices to natural gas stores to emissions, so
it's no surprise that many companies, especially utilities, are looking
at temperature, wind, rain and everything else that goes into
(00:46):
seasonal weather. As we head into another cyclical La Nina period,
what does this mean for the year ahead? Today I'm
joined by B and EF's resident meteorologists and weather analysts
Jess Hicks and Willetobin, and they share findings from their
recently published research notes titled Weather and Commodities. Nine Things
to Watch in twenty twenty five and shifting weather patterns
(01:07):
a black swan for US commodities B and EF Clients
will be able to find both of these at BNF
go on the Bloomberg Terminal or at BNF dot com.
Right now, let's talk about the weather. Jess, thank you
(01:29):
very much for coming on the show today. Thank you
for having me and Willa. Good to have you here
as well.
Speaker 2 (01:34):
Yeah, thank you, Dana.
Speaker 1 (01:35):
So we're here to talk about the weather, and I
will tell you right now, I'm not going to tell
you what the weather's like here because I'm recording from
London and it's the same way it is every February,
so we'll just leave it at that. Gray is the theme.
But actually I wanted to be a meteorologist as a kid,
so I'm very much looking forward to this. Ten year
old me cannot believe that my job is to sit
(01:56):
here and interview the two of you. And actually, you know,
I'm not going to tell you how old I am either,
but the now me is also really excited. So as
we talk about the weather, so much of our conversation
in this studio and on this show revolves around climate
and emissions targets, can we have a quick definition at
the beginning to frame our conversation about the weather and
(02:16):
create that distinction between weather and climate.
Speaker 2 (02:19):
Sure, So the difference between weather and climate really boils
down to time horizons. Weather is technically defined as the
state of the atmosphere at a given point in time,
which can be measured by things like temperature and wind
speed and pressures. Whereas climate, on the other hand, is
a long term average of atmospheric conditions for a region.
So this is going to be more of like your
thirty year averages of those types of conditions, and so
(02:43):
we can think of about that as like the thirty
year average of winter temperatures.
Speaker 1 (02:47):
Now, other than the fact that I'm really enthusiastic about
this topic, why is it that we at bn EF,
who are so focused on the energy transition are researching
this now?
Speaker 3 (02:56):
So the reason why weather is so important and why
we're researching it is because it's a fundamental part of
our lives. It impacts things as simple as what you
wear every day to things as complicated as the net
zero energy transition. Weather drives these residential and commercial power
demands through heating and cooling needs, but it also fuels
renewable power generation for wind and solar, and can disrupt
(03:19):
production and transportation of oil and gas with any extreme
weather event that hits. So these are just a few
items that come to my mind when I'm thinking about
how weather has an impact. At BNF, as meteorologists, we're
looking at short term weather forecast paired with past weather
data to achieve insights on any impacts for power and
energy sectors. So when we're monitoring weather, it's important not
(03:41):
to just look at what's happening right here now, but
also compare it to the historical averages, so create those
moving baselines and understanding how the weather is changing with time,
so that gives us an insight as to how extreme
a potential shift or a potential upsetted trend can be.
So one example of this in the EU. I've been
(04:04):
keeping an eye on wind speeds in Europe this winter
and we're seeing quite the hit to wind generation in Germany.
And when this hits, there's a massive decrease in wind
power generation and we're seeing this increasingly frequent, especially in Europe.
And then will if you have an example in the US.
Speaker 2 (04:22):
Yeah, So for US weather, I've been interested in how
extreme weather is impacting physical infrastructure for the US. So
most recently I looked at how the LA wildfires were
impacting power transmission lines. But then back in the fall
during hurricane season, I was also monitoring which oil and
gas platforms in the Gulf of Mexico were in swaths
of hurricanes.
Speaker 1 (04:42):
So we're going to talk about what some of these
extreme weather events actually are, and you'd already highlighted a
couple of them, but before we get there, I want
to have a better understanding of actually what data as
meteorologists you call upon to really formulate your research, and
you know, what information does one need in order to
start assessing this space.
Speaker 3 (05:02):
Absolutely, just to start things off, weather is a dynamic
beast to wrangle and there's a lot going on in
terms of what a meteorologist needs to monitor, so it's
important to use as much data as possible. Quite a
bit of this comes in the form of global forecast
models such as GFS, which is the Global Forecasting System
and ECMWF, the European Center for Medium Range Weather Forecasts.
(05:26):
What these offer our forecast data on temperature, precipitation, wind speeds,
cooling and warming, degree days, and even more and so
we have access to this as well as historically recorded
weather data, and at BNF we have access to two
thousand stations globally, so we can call upon this to
(05:47):
create baseline comparisons with upcoming forecast data, and this helps
us understand how abnormal and upcoming weather event will be.
There is also something we monitor called teleconnections. These are
significant relationships. There are links between weather phenomena at wildly
separated locations on Earth. Again a very technical description of
(06:07):
what a teleconnection is. It's basically different atmospheric patterns around
the world, and one you might be familiar with is Enzo,
the El Nino Southern oscillation, which houses El Nino and
La Nina.
Speaker 1 (06:19):
So that begs the question what is El Nino and
La Nina? Because I certainly remember talking about this growing up,
where you would see these periods of extreme rain and
in California, it was part of our regular lexicon. But
now I find everybody around the world is throwing these
terms around, and it seems like every year seems to
fall into one of these two categories, which I know
(06:40):
surely cannot be the case. So can you talk to
us a little bit about First of all, what one
is versus the other, and the frequency and duration.
Speaker 2 (06:47):
So and so. It is a multi year cycle of
atmospheric patterns. It actually has three phases, which would be
El Nino, La Nina, and the neutral phase. At the
most basic level, El Nino and La Nina are warm
and cold sea surface temperature anomalies. For a section of
the Equatorial Pacific. We are currently in a La Nina,
which is the cold phase of the cycle, but this
(07:09):
does not necessarily mean that the entire globe is colder
than normal. A typical La Nina year will bring wetter
weather to the western Equatorial Pacific, northern Brazil and the
Pacific Northwest for the US, and drier conditions to the
southern US and northeast China. Regional temperature shifts also become apparent,
with warmer conditions across the southern US and cooler conditions
(07:31):
in the US, Pacific Northwest, and on the west coast
of South America. El Nino is one of the oldest
known teleconnection patterns. It was actually first discovered in the
fifteen hundreds by Peruvian fishermen who noticed the periods of
warmer water in the Pacific, bringing fewer fish to their
nets around December, so they named it El Nino due
to the proximity to the birth of Christ in the
(07:51):
Christian religion. So since then there has been extensive research
into this phenomenon that now is a key factor in
our seasonal forecasting. Scientists have also discovered other similar atmospheric
patterns that inform our seasonal outlooks, such as the North
Atlantic oscillation. This pattern is a sea sawing of high
and low pressures in Iceland and the Azores and has
(08:12):
trended more positive over the last three months, bringing warmer
than average temperatures to Europe. Understanding these patterns can give
us clues as to what weather we can expect in
the coming months. While our seasonal forecasts are not yet
accurate enough to tell you how much snow your ski
resort is going to have in the three months prior
to when you were planning it, we can have an
idea of how much above or below normal temperatures and
(08:33):
precipitation will be at a regional level. So this is
really important for our energy storage levels and traders. If
the US is expecting winter temperatures to be mild with
above normal precipitation, this could lead to low gas withdrawals
from a lack of heating demand and bolstering conventional hydroelectric
reservoirs leading to an increase in renewable power generation.
Speaker 3 (08:54):
And another quick anecdote for Europe with the impact that
the North Atlantic Oscillation has. We're seeing the presence of
this this year with Lanina. So, like Willis said, in
Europe during a Lanina, we'll normally see cooler than average conditions,
but this year we've actually seen warmer than average conditions,
(09:14):
and that's because the North Atlantic Oscillation has swung into
a positive phase. So this positive phase is dominating over Lanninia,
creating that warmer than average condition in Europe. These trends
are really important to watch for liquid natural gas usage.
Speaker 1 (09:30):
And I love that you brought up the LNG part
of this because this features really heavily as we do
at b and EF twice a year, this winter gas
Outlook and Summer gas Outlook, and look at the level
of storage that we have in various parts of the world,
and as traders are looking to try and figure out
what those prices are going to be going forward. My
question really revolves around when you see this warmer weather
(09:51):
than one would infer you need less gas over the
course of the winter in order to get through. Does
that have or is that counterweighted and to what extent
does it count weighted by increased demand for air conditioning
on a particularly hot year, where you're entering a summer
that's going to have higher than average temperatures.
Speaker 3 (10:08):
It's something to monitor for sure. So when you're noticing
that warmer than average conditions are settling into an area,
for example, in winter, you are going to notice that
there is less energy demand. Now you and I might
not feel it. You and I might not feel that
it's warmer than average because technically the temperatures are still cool,
(10:28):
but the markets will feel it, and that's going to
be the interesting thing.
Speaker 1 (10:32):
Do you work closely with the gas team as a result.
Speaker 3 (10:34):
Every single day? So I know for myself in London,
I'm working with every team on my floor, So whether
that be the gas team, the oil team, the wind team,
the hydro team, we're working every single day on passing
ideas to each other and staying on top of the context.
Speaker 2 (10:51):
On the US side, we've actually done some research into
how increases in summer gas demand is not enough to
offset losses in warmer winters. One of our gas analysts
in riy Kae Gonzalez put out a report called warmer
Weather low gas prices could threaten energy transitions and it
discusses how when we have warmer winters there is less
demand for gas driven heating. We are also seeing warmer summers,
(11:14):
but in those summers, the increase in power demand can
be filled by renewable energy, so that increase in power
demand is not necessarily being filled by burns in the
natural gas sector.
Speaker 1 (11:24):
So it's really clear how weather is so incredibly important
to a number of the different commodities that are covered
at BNF. What I want to know now is a
pivot to finance. When we looked at these most recent
fires that took place in southern California, insurance came up
quite often, and then also the role of reinsurance and
(11:45):
catastrophe bonds. Can you talk about some of the financial
instruments that exist and really how these interrelate with extreme
weather events.
Speaker 2 (11:54):
So catastrophe bond or a cat bond is a high
yield debt instrument designed to raise money for companies in
the insurance industry in the event of a natural disaster.
A CAT bond allows the issuer to receive funding for
the bond if the conditions are met, such as like
a tornado or a hurricane or severe flooding. If an
event that's protected by the bond activates a payout to
(12:15):
the insurance company, the obligation to pay interest and repay
the principle is either deferred or completely forgiven. So a
CAT bond has a shorter maturity date of between three
to five years, and the primary investors in the security
are like hedge funds and pensions and other institutional investors.
But on the other hand, a reinsurance is a type
of insurance primarily purchased by insurance companies to provide a
(12:39):
layer of financial protection against weather events that could cause
major financial disasters, and as we're seeing with extreme events
becoming more frequent, the market for these types of bonds
is also growing. In twenty twenty four, the US had
twenty four rather related disaster events that individually caused over
a billion dollars in damages, with seventy one percent of
(13:00):
these events attributed to severe storms. The five year average
cost of these damages in twenty twenty four was around
one hundred and fifty billion, which was more than double
what it was ten years ago. La Nina events have
been linked to more severe storms across the US, and
so this La Nina that we are currently in could
also mean increasing market chairs for these types of bonds,
(13:22):
as severe events could potentially be more frequent this year.
Speaker 1 (13:25):
And can you put the financial losses in context, because
you know, I brought up these fires in Los Angeles
and they were really an unprecedented amount of damage in
terms of financial loss. I mean, how much was it
and how does it compare to other natural disasters which
have taken place maybe also in the US.
Speaker 2 (13:43):
Yeah, so the LA fires were a really special case
of like the kind of perfect storm of bad conditions.
So it's not that these fires were necessarily the largest
fires we've seen in US history. It's more so that
they were in Los Angeles, a fairly wealthy area, and
so the the property losses were extremely large. So the
(14:03):
estimated monetary toll of the LA fires is expected to
surpass two hundred and fifty billion, which would make it
the costiest weather disaster in US history, and that is
even greater than Hurricane Katrina, which reached two hundred and
one billion, dollars in damages.
Speaker 1 (14:17):
So one of the things that the two of you
did headed into this year was great a Things to
Watch research piece where you kind of looked at the
year ahead. And I know it's very difficult, as you've outlined,
to actually predict the weather, but given your experience in
these kind of annual and multi year trends that take place,
what are some of the things that we can expect
in the year ahead.
Speaker 2 (14:38):
Yeah, So for the coming year in twenty twenty five,
we are seeing above average fire conditions forecasted for Texas.
This is coming from the National Interagency Fire Center, which
issues wildland fire potential outlooks, and so we're seeing these
above average fire conditions through the spring. And so this
is a combination of below average precipitation, above average winds,
(14:58):
and above average temperatures. And so from the Bloomberg Terminal,
we have these seasonal forecasts, which is showing all three
boxes are checked for Texas for the spring. But the
National Weather Service also issues temperature and precipitation outlooks for
the next twelve months, and so in those we are
seeing above average temperatures for Texas, which means that we
could see fire conditions persisting throughout the year, and so
(15:20):
the only thing that is left is an igniti event
to cause another string of devastating wildfires.
Speaker 1 (15:26):
So related to fires, but also related to the energy system,
I want to talk about precipitation and essentially water levels.
Can you make that connection spell it out for us
regarding how rainfall is actually connected to power and emissions.
Speaker 3 (15:43):
Absolutely, So I just want to preface this with we
have a focus on the US and Europe, but in
our nine Things Weather to Watch for twenty twenty five,
we took a look at China and what we're seeing
right now in China is something very interesting. So at
the end of twenty twenty four, water levels at one
of the biggest dams, actually the biggest dam in China.
Speaker 1 (16:05):
Is it the three Gorgeous Dam.
Speaker 3 (16:06):
Three Gorgeous Dam, the water levels measured four meters below
the five year average. Now, this doesn't sound like a lot,
but thirteen southern Chinese provinces in the last six months
have undergone drought warnings. Thankfully though, La Nina is bringing
a much needed reprieve to this area. So I've been
(16:27):
monitoring the weather reports and right now in some areas
of southern China. They're registering sixteen millimeters above the average.
It has relieved the drought stress on any hydropower plants
in southern China along the Yansee River. But this drought
scare has revitalized concerns over a clean, stable energy generation,
(16:51):
especially during periods of low hydropower output for the nation.
So to preface this with context, the issue began in
twenty twenty two there was an tense year long drought
and into twenty twenty three that hit the southern provinces
housing the Yangsee River. So this is the largest river
in China as a whole. This river is crucial for
hydropower and specifically Sichuan Province a key upstream province for
(17:14):
water recharge. It's also a province that makes up thirty
percent of China's hydropower. It saw water levels drop by
thirteen meters that year, so during this period, Sichuan Hydropower
actually recorded an eleven percent drop in hydro power outputs.
So the stability of the hydropower in southern China as
a power source in that area left room for concern
(17:38):
thinking about future peak energy demand, and so this short
term prioritization of coal is offering some stability for China
as they're aiming to amp up the renewable energy capacity
to meet the twenty thirty renewable targets.
Speaker 1 (17:51):
So very simply put, when you have low rainfall in
areas that are requiring hydropower to be a part of
their energy mix, they have to turn to other sources,
and in some circumstances that leads to higher emissions. So
rain level is definitely linked. Let's also talk about how
droughts connect to not just hydropower, but also to other
fuel sources like biofuels. Naturally a lot of them come
(18:11):
from sources like soybean, rape seed, So can we talk
a little bit about how there may be droughts right
now and how that's impacting the biofuels market.
Speaker 3 (18:20):
It's another interesting topic we touched upon in our nine
Things to Watch, So it's important to think about upstream
as well as downstream impacts. And I really want to
put a spotlight on Brazil and Brazil's upcoming biodiesel outlook.
There's been hurdles at nearly every turn. So brazil biodiesel
relies on that nationally grown soybean and twenty eight percent
(18:42):
of national soybean is grown in Matagrosso, so again another
spotlight on this region in Brazil. Not only was the
planting season hit with fifty six percent below average rainfall
during the first seventy five percent of that season, harvest
season is now saying delays with one hundred percent above
average rainfall, So I just want to stop one hundred
(19:02):
percent above average. So farmers are seeing floods, roads are
becoming impassable, bridges are being destroyed, on top of the
fact that farmers need to get into their fields and
harvest their crop. So what's happening here is that we're
seeing not only potential impacts on germination and a shorter
growing window early on in the crop cycle, but we're
(19:24):
also seeing moisture control issues at harvest. So this all
leads to ending production values of Brazil and soybean potentially
going down. So what will the final output be? Will
be lower than expected, and from there, how does that
impact allocation towards biodiesel on top of other uses. So
this is really important to think about when we're thinking
about Brazil's Fuel of the Future bill that was passed
(19:46):
in October twenty twenty four, and the pressure on Brazil
right now is to push the biodiesel blend and diesel
oil up to fifteen percent. So with this impact on
local soybean, what will be the impact on biodiesel.
Speaker 1 (19:59):
This here so floods, droughts that they don't just have
to do with water. So can you actually pivot now
to what impacts renewable energy wind power and what is
referred to as a wind drought.
Speaker 3 (20:11):
So these are prolonged periods of time where wind speeds
are registering two meters per second or less, and if
we look at the data that comes out of it,
the impacts are actually pretty shocking. So during an average
wind drought, if wind speeds drop by ten percent, power
generation can drop by up to thirty percent, which is
I don't know about you, but that's a pretty shocking statistic.
(20:33):
And this is becoming very important for countries whose generation
capacity is made up of a high proportion of wind.
So when periods of low wind hit, this could undercut
renewable energy output and exacerbate reliance on fossil fuels. So
right now, if we can turn our spotlight to Europe,
we're seeing a particularly striking impact in countries like Germany,
Europe's top country for wind production. So in twenty twenty
(20:57):
three and twenty twenty four there were four separate months
that Regis stirred wind rout events in Germany. Just two
of these events in twenty twenty four led to win
generation reductions of sixteen percent against the five year average,
and as a result, total German win output for twenty
twenty four fell by six percent from the previous year,
and this was despite capacity increasing three percent year over year.
(21:19):
So you can see the impact something like this can
have on a country. But how do we forecast these
It's incredibly difficult to accurately predict where wind will blow
and how strong it will be. But in Europe, low
pressure systems driven by the Gulf Stream tend to bring
weather and in this case, windier conditions. Tracking rainfall tied
to these systems in long range forecast can offer insights
(21:42):
into when wind dear weather may develop.
Speaker 1 (21:44):
So I think we've done a great job of laying
out why not only those who are covering commodities, but
financial players, companies in the energy system, anybody looking in
anything that's project power development, they are going to be
focused on actually chain changes to the weather and what
is becoming increasingly unpredictable as we extrapolate this out, and
(22:05):
we know that a change in climate leads to a
disruption in the water cycle and therefore a change in weather.
Often when you see extreme weather events, there's a debate
over whether or not you can actually link a specific
weather event to anthropogenic climate change. And I want to
understand why it is so difficult to make that connection.
(22:26):
When we zoom out, the connection seems quite obvious. But
when it comes down to a specific place and time,
why is it that there is so much debate over
tying something to a specific natural disaster.
Speaker 2 (22:37):
So I think that this question really ties back to
the definition of climate versus weather. When we're talking about weather,
we're looking at the timescale of like hours to days,
So weather changes every day, you know, like yesterday's weather
is not necessarily the same as today's. But in terms
of the climate, this is thought of to be the
typical conditions for a region during a specific time of
the year, and so when we look at climate change,
(22:59):
we can see that over the past like thirty to
fifty twelve hundred years, the weather that we are experiencing
now is not the same as it was back then.
So extreme weather has also been happening since the dawn
of time, but our methods of data collection have only
recently become quite so sophisticated.
Speaker 1 (23:15):
Delineation between averages and frequency as opposed to a specific
point in time. Where we know that extreme weather events
do happen, it's just how often and to what degree
of intensity on a global basis. That's really so we're
really ending how we began, which is this delineation between
weather and climate and what conversation each of those terms
(23:37):
is appropriated.
Speaker 2 (23:38):
Yes, and so when we talk about extreme weather, it
can be hard to link these events to climate change
just because of the infrequency in which they happen. When
you think about hurricanes, especially like a Category five storm,
those events are only maybe happening like three times a year,
and so it can be very hard to look at
a historical trend in these events when they happen so
(23:59):
infrequently and to then be able to link them to
climate change. But there has been significant research in this
area in linking the intensity of these storms to climate change.
So we know that like factors that contribute to their
intensity are increasing and have been tied to climate change,
things such as sea level temperatures and sea level rise.
And so while we can measure the factors that contribute
(24:20):
to these extreme events and lick those to climate change,
it can be hard sometimes to link the extreme event
itself because these events happen so infrequently, and since weather
has always been happening. But it's really the intensity of
these events that we are seeing as a result of
climate change.
Speaker 3 (24:35):
And so I before I was a meteorologist, I was
a paleo climatologist, which is a really fancy way of
saying I studied past climate, and when you're looking at
past levels of CO two, it pairs almost exactly with
past levels of temperature. And when we're seeing these massive
shifts upward of CO two, you see paired rises of
(24:59):
temperature over time. And what's really striking recently is that
the amount of CO two that we're seeing increase year
after year is happening at a much faster rate than
what we ever saw in paleoclimate history. And so this
is why we're seeing the impact of more extreme weather
(25:20):
tied to these increasing global temperatures, because our natural systems
aren't used to this rapid change. And so as weather
is a form of equilibrium it's trying to adjust, and
with that adjustment comes stronger, more intense storms on this occasion.
So that from my perspective, that's kind of what I'm
looking at.
Speaker 1 (25:41):
So Jess Willa, thank you for giving me even more
reasons to be checking the weather report and for sharing
some insights regarding how various climate events extreme and otherwise
are connected to our energy system and so many of
the commodities that we deal with on a daily basis
here at BNF.
Speaker 3 (25:58):
Thank you very much.
Speaker 2 (25:59):
Dana, Yeah, thank you so much for having us.
Speaker 1 (26:10):
Today's episode of Switched On was produced by Cam Gray
with production assistance from Kamala Shelling. Bloomberg NEIF is a
service provided by Bloomberg Finance LP and its affiliates. This
recording does not constitute, nor should it be construed as
investment a vice, investment recommendations, or a recommendation as to
an investment or other strategy. Bloomberg a NEIF should not
be considered as information sufficient upon which to base an
(26:32):
investment decision. Neither Bloomberg Finance LP nor any of its
affiliates makes any representation or warranty as to the accuracy
or completeness of the information contained in this recording, and
any liability as a result of this recording is expressly disclaimed.
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