This winter’s chill is heating up the investment outlook for energy and commodities, with diesel fuel offering a hot opportunity for quick returns. Forecasts for a protracted freeze mean the agricultural sector will feel the impact as well, yielding a price spike in citrus and other affected crops along with promising prospects to profit on commodities and the agribusiness market. For more on this story, see the following article from Money Morning.
A relentless surge of cold weather is slamming nearly every country in the Northern Hemisphere, disrupting travel, threatening crops and driving energy and commodity prices higher as investors look for ways to cash in.
In the United States, crude oil is trading near a 14-month high. Natural gas and heating oil prices have also surged, as the U.S. shivered under the onslaught of an arctic express that sent temperatures plummeting below zero across two-thirds of the country. Even Florida growers try to protect orange groves from overnight freezing temperatures.
The cold snap is one of the nation’s most widespread since January 1985, according to meteorologists at Accuweather.com. While the cold is expected to ease slightly starting Thursday, this winter is on track to be one of the coldest in the past two decades, Ken Reeves, director of forecasting operations at Accuweather told The Wall Street Journal.
The arctic chill has truckers hauling freight across the U.S.A. scrambling to keep their engines running by supplementing diesel fuel with high-octane distillates.
“Once the temperature hits 32 degrees (fahrenheit) or below, truckers have to cut their diesel fuel with kerosene or their engine blocks can freeze,” said Dr. Kent Moors, a Money Morning Contributing Writer, and an advisor to the American Trucking Association, said in an interview.
Even aluminum and copper prices rose in response to the poor weather, as investors worried that production in China would be curtailed.
“The weather is cold everywhere in the Northern Hemisphere, with Europe getting walloped and China as well,” Anthony Nunan, an assistant general manager for risk management at Mitsubishi Corp. in Tokyo told Bloomberg News.
Beijing reported the coldest morning in almost four decades. Temperatures were at or below freezing across most of northern and central France, sinking as low as 24 degrees in Paris. London’s Gatwick airport suspended flights to clear runways of snow. Local U.K. governments said some were running short of de-icing sand and salt.
In fact, K+S AG (FRA: SDF) Europe’s biggest potash producer, said factories producing de-icing salt are running at full capacity and it’s struggling to meet sudden demand with northwestern Europe in the grip of a prolonged cold snap.
“The cold weather is hitting a lot of the more populated areas, such as western and northern Europe, a lot of the eastern U.S.,” Bob Tarr, a meteorologist at Accuweather, told Bloomberg in a telephone interview. “It’s a rare pattern and unusual to see this cold weather affecting a number of major population centers and persisting for about three weeks.”
And things are expected to stay cold for the near future. The Climate Prediction Center of the National Weather Service forecast below-normal temperatures from Texas to Maine through Jan. 17.
Besides snarling travel and making life generally unpleasant, the cold weather has implications for investors – especially those focused on commodities. The Dow-Jones UBS commodity index on Tuesday traded as high as 145.11 in trading a 12-month high.
Energy Prices Surge
Energy consumption tends to rise significantly during extreme cold weather. In the record cold winter of 1976-77 additional energy consumption cost $3.8 billion in 1980 dollars, including increased costs for electricity, natural gas, fuel oil, and coal.
During the present cold spell, frigid temperatures in the United States are expected to boost the country’s heating demand to 21% above normal, with demand in the Northeast – which consumes about four-fifths of U.S heating oil – 11% above average levels, Bloomberg reported.
The increase in demand has the energy complex on the rise across the board. Oil prices rose to a 14-month of $83.52 in New York trading yesterday (Wednesday) and heating oil prices are hovering around $2.20 a gallon, their highest levels since mid-October.
“Oil prices are on a cold-weather rally, with heating oil demand seen rising for the next few weeks amid forecasts for temperatures for much of the country to be much below normal in that period,” Andy Lebow, broker at MF Global Ltd. (NYSE: MF) in New York told Reuters.
Natural gas prices will probably rise not only on the back of the cold snap, but also may be affected by a pickup in mergers and acquisitions activity, Moors said.
The United States uses about 1.2 trillion cubic feet of natural gas in a normal year, according to Moors. Even though the country has about 3.8 trillion cubic feet of natural gas in storage, he believes we used about 800 billion cubic feet in December alone, and the country could use in excess of 2.5 trillion cubic feet during this season.
“But with a 100 year supply on hand I expect gas prices to rise only gradually to say $6 to $7 per thousand cubic feet,” Moors said.
In the short term, Moors singled out diesel fuel as the “one to watch.”
Crop Prices On The Rise
Prices for agricultural products are also likely to heat up as the chill sets in.
In the winter of 1983-84, a single cold snap around Christmas destroyed over $1 billion of the citrus crop in Florida. Louisiana lost 80% of its citrus crop, Tennessee estimated $15 million in agriculture losses and Texas experienced hundreds of millions of dollars in crop damage according to the National Oceanic and Atmospheric Administration.
This week, waves of Arctic air hammered central Mississippi, Alabama and the Florida Panhandle , where farmers were scrambling to save strawberries and tomatoes as temperatures dipped into the 20s. Hard freeze warnings covered the region Tuesday, according to the National Weather Service.
Even parts of the country that are used to subzero temperatures are likely to suffer some damage. About 500 million bushels of corn are stuck under snow in North Dakota, South Dakota, Minnesota, Nebraska and Wisconsin, according to Martell Crop Projections, Bloomberg reported. Corn prices surged to their highest levels in three months on Monday rising above $4.35 a bushel.
Winter wheat crops in the central Plains states may also dry up due to a combination of low snow cover, which normally insulates the plant sprouts, and very cold air forecasters said.
But while the Climate Prediction Center of the National Weather Service is forecasting normal to above-normal temperatures later this week from Michigan to Nebraska, in citrus-growing areas of Florida and Texas, farmers prepared for a long week trying to protect their crops.
Parts of central Florida could see lows below freezing nearly every day this week. In Polk County — between Tampa and Orlando — temperatures were in the high 20s and strawberry farmers turned on sprinklers to create an insulation of ice for the berries.
“The problem now is that we have a weeklong freeze predicted,” Ted Campbell, executive director for the Florida Strawberry Growers Association told Bloomberg. “It’s an endurance test.”
Andrew Meadows, a spokesman for Florida Citrus Mutual, a trade organization based in Lakeland, told Bloomberg it would be “a nerve-wracking night” for growers.
Although the purest play on a citrus freeze is the orange-juice futures contract, which jumped 3.1 cents yesterday, risk averse investors might prefer to capitalize on weather-related agricultural losses by taking a closer look at the Deutsche Bank AG (DB) managed Power Shares DB Agricultural (NYSE: DBA) exchange-traded fund (ETF), the ELEMENTS Rogers International Commodity Agriculture (NYSE: RJA) ETN, or the Van Eck Market Vectors Agribusiness ETF (MOO).
This article has been republished from Money Morning. You can also view this article at Money Morning, an investment news and analysis site.