The winter of 2009-2010 continues to get off to an extremely fast start (considering winter doesn’t technically begin until next Monday), with cold air firmly entrenched across most of the country and two storms set to affect a big chunk of real estate, one this weekend in the Mid-Atlantic and Northeast and a second storm Christmas Eve across the Heartland and Ohio Valley. More on these storms and the ubiquitous cold air in a minute.

Following my posts last week highlighting the prospect of a surge of cold air, I took profits on some of my long-term tech core positions and used the funds to bulk up my holdings in the energy sector. I now own roughly equal quantities of Chesapeake Energy (CHK), UNG (natural gas ETF), and Piedmont Natural Gas, a utility (PNY). I also own a smaller, speculative position in one of The Fly’s picks, Sandridge Energy (SD). I am up between 5-15% on all of these positions.

For the first time since early summer of 2008, I feel comfortable holding positions in the natural gas sphere for more than just quick swing-trades. I see multiple bullish driving forces in the sector beyond the cold weather, including

1) Increased M&A activity. I expect that the Exxon-XTO deal was only the beginning of an upswing in consolidation within an industry picking up the pieces of a popped bubble.

2) Upward revisions of 2010 worldwide demand, particularly in developing nations. Not only does this bode well for consumption, it also means that the US will receive less LNG from overseas. This will obviously benefit domestic producers.

3) Strong withdrawals. This morning’s  incredible 207 BCF withdrawal was the highest for this particular week since reliable records began in 1993, and is the biggest withdrawal overall since the week of January 25, 2008. Natural gas is up over 6% on the news. By springtime, I suspect that our current oversupply will have been corrected.

4) Santa Clause. Not only does he sponsor this annual sucker’s rally, but the guy lives in the North Pole and output in his workshop is currently maxed out. Residential Demand. Check. Industrial Demand. Check. And out of fear of his precious polar ice cap melting, I imagine he has switched form burning coal to the much cleaner-burning natural gas.

Now on to the weather. Lots to talk about.

Storm I: The Snowstorm To End All Snowstorms, for the Southeast, at least.

This one has a chance to be a serious barn-burner for the Mid-Atlantic and potentially the Northeast this weekend. In parts of North Carolina, Virginia, and Maryland, the storm looks to bring the highest storm totals in six or seven years. A broad map of the system is shown below.

Figure 1: Projected snow totals across the East

These projected accumulations are actually rather conservative. Some of the computer model runs have been frankly unbelievable, rivaling the infamous Blizzard of ’96 in Virginia and North Carolina. If they verify, some regions of the Blue Ridge may receive up to 2 feet! This is the sort of storm system that can absolutely paralyze the region for up to a week. Due to inconsistency among the models, I am going for a more conservative approach right now.

I really enjoy seeing southern snowstorms because the on-camera meteorologists at The Weather Channel, which is based in Atlanta, freak out and become absolutely giddy and start behaving like school-children. Of course, speaking as a current resident of northern Virginia who is eagerly anticipating this storm, this is a small case of the pot calling the kettle black.

Anyways, the area of low pressure that will spawn the winter storm is unusually far south in the Gulf of Mexico and thus is endowed with bountiful tropical moisture. It will cross Florida late Friday evening and undergo explosive deepening off the Carolina coast, throwing bands of heavy snow and wind onshore beginning Saturday morning and lasting into early Sunday. Areas such as Raleigh, Charlotte, and Richmond will be at the southern end of the storm and may mix with rain at times and will ultimately receive between 3-7 inches, more as you head north. Areas near the Blue Ridge such as Roanoke, Charlottesville, and Winchester look to hit the jackpot on this one and could receive over a foot of snow, with isolated areas seeing up to two feet. For the southeast, these are ungodly amounts of snow. At the moment, Washington, DC is at the very northern end of the heavy snow envelope and I see the city receiving between 4 and 8 inches, more if the system tracks further north, less if it stays south.

Questions remain whether the storm will then continue northward and deliver heavy snows to the urban corridor of Philadelphia, New York, and Boston, or if it instead just moves out to sea. Computer models currently favor the latter. Cold air will not be a limiting factor here, and any precipitation that does so will likely be snow. Instead, it will come down to interactions of the jetstreams. If the Subtropical Jetstream, which will guide the storm across the Southeast, phases and merges with the northern Polar Jetstream supplying cold air to the Northeast, the storm will swing up the coastline. If the two remain separate, the storm will follow the southern jet and move out to sea, missing the Northeast. In my years of following storms like this, I have frequently seen the storm track shift northward. Thus, I give marginal odds of seeing at least some snow this weekend in New York City.

It will be interesting to see if this winter storm affects the opening weekend of James Cameron’s 12-years-in-the-making space epic, AVATAR. The film looks unbelievable and extremely positive reviews have been piling in. Some in the industry expect Avatar may challenge box-office champ Titanic’s (Cameron’s last movie) $600 million domestic haul down the road. In 2003, the President’s Day Storm negatively affected the opening of the film Daredevil starring Ben Affleck, resulting in the gross from Saturday to Sunday tumbling 36% as the storm kicked in, compared to a typical 10-15% fall. A blockbuster film like Avatar could easily make over $100 million in its opening weekend, but a snowstorm in the major markets of the northeast and mid-Atlantic both Saturday and Sunday could shave $10-20 million off the three-day total. Just something interesting to watch, especially if the storm makes it to the Northeast.

In terms of investing, I really like my PNY utility position right here with this storm, as their greatest customer base is in the Carolinas, Tennessee, and southern Virginia, areas that are likely to be beset with below-average temperatures and heavy snow. The stock is not a big mover, but has been consistently climbing since my purchase and it also boasts a solid 4.5% dividend. With regards to the commodity itself, one has to remember that commercial natural gas demand exceeds 15% of total US consumption. Since this storm will primarily be a weekend event, the total draw might be marginally smaller than it otherwise would be if the storm occurred mid-week. Along the same lines, total draws might be somewhat smaller than projected next week since it is a holiday week and most schools/businesses are closed at least part of the period.

The Cold:  F%@K Global Warming

After a brief warm-up early last week, cold air has once again settled south and this time, it has fortified its position and will be around for a while, particularly east of the Rocky Mountains.

The long duration of this early-season outbreak is due largely to what is known as a Blocking Pattern, which has set itself up over northeastern Canada. In a typical “progressive” pattern, kinks in the polar jetstream allow cold air to occasionally move south from Canada, but, like waves on a snaking jump-rope, these are quickly shunted eastward and mild air can return from the south via a reactionary wave. However, in this blocking pattern, a large stationary dome of High Pressure is parked over Quebec and acts as a roadblock, preventing these troughs from progressing eastward and off the coast. Instead, the jetstream is forced to dive south behind this High where it can remain for an extended period of time. That is what is happening here, and I expect temperatures Christmas Week to remain well-below normal, throwing more fuel onto the natural gas fire. Below is a map of the projected departure from average Heating Degree Days for the next week, showing substantially below average temperatures in the East.

Figure 2: Plot of projected departrure from average heating degree days for the next 7 days, showing very cold air in the east.

While the cold will not be as extreme as last week’s arctic blast, it will be centered across the Northeast and Ohio Valley, areas of much higher population density than the Great Plains and Midwest, which will lead to greater energy consumption. Beyond the timeframe of these maps and projections, some long range models indicate yet another surge of cold air taking shape over the western Great Plains after the Holidays. I expect this will continue to result in steep natural gas withdrawals over the next two weeks. Due to the general pervasiveness of the airmass, I like the commodity here (UNG), rather than any local niche play.

The Christmas Storm: I’m Dreaming Of A White(out) Christmas

I’m not going to talk about this one at length due to its considerable uncertainty, but right now there is potential for a very large storm to affect most of the Midwest on December 24 and Christmas Day. A long-term run of the GFS for Christmas Eve can be seen below, showing this behemoth. The system looks strikingly similar to the one that slammed the Plains last week, with a very tight pressure gradient indicating the threat of blizzard conditions on the backside of the storm.

Figure 3: GFS run for Christmas Eve showing an area of snow m0derate-to-heavy snow across the Midwest. Source: NOAA

Right now, areas from St. Louis, to Omaha, to Chicago, to Cleveland have an excellent shot at seeing a White Christmas.

The models keep flip-flopping back in forth as to whether the East Coast gets snow or rain once the storm reaches the region late on the 24th. There will be plentiful cold air in place ahead of the storm, but there is also a chance that the shear strength of the storm will drag sufficient warm air from the Gulf of Mexico to erode this base.

In conclusion, it looks like it will be a busy week ahead. While there is still considerable uncertainty regarding the two snowstorms, I am very confident that most of the United States will see below average temperatures for the foreseeable future. While I like natural gas’ prospects longterm, with the price now exceeding my short-term target of $5.50/MMBTU and approaching $6.00, I would be very hestitant to add more to my positions.

I was going to talk about the volcano in the Philippines, but this post is long enough.

Regards,

Dr. ‘Cane

**Calvin and Hobbes is the property of Bill Watterson. No infringement is intended**

Disclaimer: What do I know. Consult your local NWS forecast before making any really important decisions.