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Materials Risk

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El Niño Risk Rises Heralding More Commodity Price Volatility

Latest forecasts from the US Climate Prediction Center and the Australian Bureau of Meteorology indicate that climate conditions continue to shift towards El Niño later in 2012. The weather phenomenon results in warmer waters in the Pacific increasing the risk of rain impacting crops in key agricultural regions while also reducing the incidence of tropical storms in the US Gulf, a key oil producing region.

El Niño is a warming of sea surface temperatures in the equatorial Pacific that occurs every 4 to 12 years. El Niño events have occurred in 2002/03, 2004/05 and 2009/10.

Forecasters have found that the number of warm spots across the central Pacific has grown. El Niño type conditions often form several months before it is officially declared suggesting that current observations may result in an El Niño forming by September.

In terms of commodity producing regions, El Niño typically results in drier conditions across Australia, other south east Asia and Brazil but wetter conditions around the southern US states and coastal areas of South America.

El Nino

El Niño reduces US Gulf storm risk while bringing extreme winters to the US

El Niño increases wind shear in the Atlantic acting as a block to tropical storms from forming. So far in 2012 there have been four tropical storms, with just Tropical Storm Debbie resulting in the loss of 44k bbls per day for a brief period. 

The most recent forecast from Colorado State University points towards a further 9 tropical storms, 5 hurricanes and 2 major hurricanes. If El Niño does develop further there is likely to be few storms in the US Gulf and less upward support to oil prices.

In El Niño events, portions of the US Midwest tend to experience a much warmer than normal winter, while the southeast US tends to experience wet and cool conditions. Whichever impact is greater has implications for US natural gas prices.

Agricultural commodity prices likely to see further gains

Apart from the energy sector, global agricultural production could also suffer massive disruptions from the warming caused by El Niño.

In South America drier conditions in Brazil and Argentina (key producers of sugar, coffee and soybeans) may see their crops damaged as prolonged heat can damage yields. Meanwhile further south copper producing areas of Chile are likely to see an increased risk of floods impacting copper output.

In South East Asia El Niño typically results in drier conditions. As with other crops prolonged heat can damage yields. The region is home to 90% of global palm oil supplies, 40% of the words wheat production and the bulk of natural rubber output.

El Niño can have positive as well as negative economic impacts

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The 1997/98 El Niño was particularly strong and so its impacts may not reflect future El Niño events but they give an example of the scale of the economic impacts.

In the USA agriculture sector losses were estimated at $1.5-1.7bn in 1997/98. Meanwhile warmer weather resulted in a reduction in heating costs of some $6.7bn.

By. Peter Sainsbury


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