Winter weather a bigger risk for energy than agriculture

The 2015 fall has seen some significant weather deviations: Europe and the US have been much warmer than average over November-December while weather has been hot and dry across Asia over the last few months.

El Niño is key but there are other weather oscillations at play
The majority of these weather deviations are due to El Niño conditions, with the current episode forecast to be the 3rd strongest since 1950, just shy of the 1982/83 and 1997/98 winters. However, El Niño conditions don’t explain the warm European winter which is due to other oscillations also in a strong positive (warm) phase: the Arctic Oscillation (AO, related to the polar vortex) and the North Atlantic Oscillation (NAO, related to Atlantic pressure differentials and the Jetstream). While these warming oscillations are only forecast to last until the end of 2015, El Niño conditions are forecast to last until spring or early summer 2016.

Large and certain effects for cocoa, wheat, palm oil & beans
The impact an El Niño has on commodities is uncertain, not least because every El Niño has subtle but important variations. By focusing on regions which are both critical for global commodity supply/demand and have seen historically strong and recurring El Niño weather effects, we find evidence of effects on cocoa, wheat, palm oil (negative for supply) and soybeans (positive for supply). Metals can see negative supply impacts, but this is more uncertain. For natural gas and heating oil demand, both are likely to face negative demand pressures from El Niño, but the certainty over the magnitude of these pressures is substantially lower than for positive AO / NAO phases, which are forecast to end soon.

Large inventories mean that downside energy price risks are more acute than upside agriculture price risks
Given significant oversupply, inventories have been building across most commodities since mid-2014 and negative demand shocks (or positive supply shocks) are now much more likely to have outsized negative price effects – particularly for commodities where storage is limited such as energy. As a result, we continue to see the largest near-term downside risks on distillate and crude oil prices, especially should the AO / NAO remain in their warm phase. While warm weather would continue to reduce US natural gas demand, the price decline has already been significant with prices nearing levels where output will be curtailed.