7 ways winter weather could affect commodities
Since commodities are real things — such as crops, livestock, minerals, metals or other materials of value — prices can sometimes be affected by winter weather. Frozen ground and colder temperatures can affect materials, which has an secondary impact on everything from energy to shipping to growing.
But sometimes it's a complicated relationship.
"Weather is unpredictable, so the less normal the winter, the more volatile commodity prices will become," says Daniel Hall, assistant professor of economics at High Point University. "This can cause 'extreme weather' in financial markets."
Oil and gas. It's a no-brainer that people use more heating oil and natural gas in the winter. But people also drive less during colder winters, so they use less gasoline. So it's like a strange pendulum: heating oil spikes in the cold months, while gasoline rises in the warm months.
Investing wisely can be just as complicated. If forecasters are talking about a colder-than-normal winter, does that mean you watch the weather report like a hawk and invest in natural gas exchange-traded funds or futures or contracts if you see a huge cold front in the 10-day weather forecast?
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"If you think it's going to be cold, you can own some natural gas. But that is a very volatile, expensive contract. One contract can move greatly against you or for you," says Vic Sperandeo, president and CEO of EAM partners, a professional money manager with more than 45 years of experience investing in the commodities space.
If you're investing in commodities contracts (and not lower-risk ETFs) a dip of just a few cents in the price of oil can cost you thousands of dollars, Sperandeo says.
The winter volatility in oil, gasoline, diesel and natural gas commodities is partially due to the fact that these energy sources are largely taken out of the ground in the spring and summer months, and stored for use over the fall and winter months, says John LaForge, head of Real Asset Strategy for Wells Fargo Investment Institute.
"Winter, especially, with freezing conditions, is not the ideal time to be extracting large amounts of energy," he says. "So, if winter is colder than normal as an example, more energy in storage must be used. If the cold streak continues for a sustained period, energy in storage can begin to deplete, which can spike energy prices."
Another factor is OPEC. The group's meetings can cause the cost of crude to rise or lower, even without the cold weather.
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Does it mean you sell your investments related to heating oil quickly when the weather warms?
Yes, Sperandeo says, but the only problem is that you'll be competing with a crowd who also wants to sell. "Everybody anticipates these things, so it's not easy to wait for the forecasts because there's huge amounts of money bet on this and – and it's a very complex business," he says. "It's hard to make money."
Yet Phil VanHorne, CEO of BlueRock Energy and energy/commodity expert, predicts natural gas prices will be bullish due to higher demand.
He sees prices for natural gas increasing, particularly in the winter and summer months. His reasoning is that the supply side of the equation is staying constant or decreasing a little while demand is increasing. "The demand side increase is due to more and more reliance on natural gas as a fuel for power plants, and the more recent weather forecasts are calling for colder-than-normal weather this winter," he says.
Jet fuel, which influences airline stocks, is also closely linked to the heating oil fluctuations, Sperandeo says.
Orange juice. If there's a freeze in Florida, orange juice prices can jump. "The price of orange juice futures are significantly affected upward by a colder-than-expected winter creating negative supply shocks and (prices move) downward by a warmer-than-expected winter creating positive supply shocks," Hall says.
But juice has smaller contracts than oil, so there's a lot less swing. "Every cent is $150. But every cent in crude oil is $1,000," Sperandeo says. Energy commodities are also input into the production and transport of agricultural commodities and some other commodities prices, so the increase in energy commodity prices could put upward pressure on agriculture and other commodities. Markets are interconnected in complex ways we might not ordinarily suspect.
Lead. Although it is a metal commodity, it might also be considered an "energy" commodity since it is used in batteries that are more likely to fail in cold weather, Hall says. "Producers of batteries increase their demand of lead prior to winter weather in anticipation of higher demand, which causes lead prices to rise earlier in the year up until the end of the year when battery companies are stocked up."
Wheat, corn and soybeans. "If it stays very cold for a long time, that has a meaning," Sperandeo says. A long, cold winter can cut the growing season short. "But cold weather doesn't mean too much to soy beans and grains in the wintertime, because they're always down in the wintertime, and that's when you plant them." Spring and summer months are most important to grains, and whether there's too much or too little rain. Both conditions kill crops and reduce supply, which hikes their prices, Sperandeo says.
Livestock and meat. Hall says warmer-than-expected winter can lead to higher-than-expected crop production and an increase in supply lowers prices. "This could also lead to decreases in livestock and meat commodity prices, as livestock use these grains for feed," he says.
Coffee. Watch the weather in Brazil in March, Sperandeo says. "In wintertime, coffee is in large. So, if it's very, very cold in Brazil, in March, which is the wintertime, you could see a spike in coffee."
Gold and silver. These precious metals are not affected as much by weather as they are by winter elections. Sperandeo calls gold and silver "the most undervalued commodity for an investor." Other industrial commodities such as copper, tin, aluminum, nickel, zinc, lead are rising "through the roof," he says. And if there is growth and inflation in the U.S. or a break in the European Union in 2017, gold and silver "will move up rapidly," he says.
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