Why energy traders need accurate weather forecasts

Businesses – large and small – are impacted by weather. For example, offshore oil and gas companies need to have access to specific weather information to help them make important decisions about protecting billion dollar assets. And, another business sector that’s heavily impacted by weather—and weather forecasts—is energy trading. There is an active market for natural gas purchases and sales. This consists of futures contracts that define at what date and for what price a party must buy or sell natural gas from or to the other party. Many factors affect the supply and demand for natural gas, which moves the price of these contracts. However, the most significant driver for supply changes—at least in the short term—is the weather, with the temperature being the primary factor. For example, if a cold blast is forecast in the winter, natural gas prices will generally go up because furnaces are cranked to keep buildings warm. Similarly, when a heat wave is forecast in the summer, natural gas prices may go up because more electricity is required to handle the high air conditioning load, with a large portion of that electricity generated in natural gas power plants. Natural gas traders and hedgers can be grouped into three types: Producers of natural gas who sell their production and want to secure commitments in advance to lock in prices or guarantee sales Buyers of natural gas, including those in the industry who generate electricity, as well as commercial and residential users (see pie chart below)…

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