Source: Golden Ten Data

Global temperatures continue to set new records, and people all over the world have already begun to suffer from this catastrophe. It's going to get worse.

As the northern hemisphere enters summer, it is increasingly likely that 2024 will be the hottest year in history. Prices for some of the world's most important commodities — natural gas, electricity, and major crops such as wheat and soybeans — are rising. The shipping industry from the Red Sea to the Panama Canal is already in chaos, and the dry waterways are likely to once again destabilize the shipping industry. The possibility of wildfires raging is also increasing.

The bleak outlook is a reminder of how bad weather due to climate change can increase inflation and drive up energy, food, and fuel costs. Frequent natural disasters also increase the risk of damaging losses and insurance costs, while making it more difficult to predict market trends.

According to Munich Re (Munich Re), extreme weather and earthquakes last year caused global losses of 250 billion US dollars.

Some experts are predicting that US gas prices may jump more than 50%, while wheat and coffee markets are also expected to rebound.

According to data from the US National Centers for Environmental Information (National Centers for Environmental Information), from a global perspective, the first four months of 2024 are the hottest months in 175 years. According to US agency analysis, 2024 will definitely rank in the top five hottest years on record, and there is a 61% chance of crowding 2023 out of the top spot.

To make matters worse, record ocean temperatures are likely to trigger “explosive” tropical cyclone activity. The La Niña phenomenon, which is expected to occur in August, will exacerbate hurricanes in the Atlantic Ocean and also cause droughts in the western and southern parts of the United States.

For the global economy and oil market, “the biggest risk is not the Russian-Ukrainian conflict, not Iran, or the war between Hamas and Israel,” said Edward Morse (Edward Morse), senior advisor to Hartree Partners LP and former head of Citigroup's commodity research department. “This summer, the biggest risk for the entire world is the Gulf of Mexico hurricane season.”

Let's take a look at the markets that are likely to experience the most volatility.

Natural gas prices are expected to soar

Gary Cunningham (Gary Cunningham), head of market research at Tradition Energy, said that if the hot weather increases the use of air conditioners enough to erode current sufficient natural gas stocks, the price of US gas futures could soar to $4 per million thermal units later this year. Meanwhile, due to current relatively low prices, producers are cutting production in shale basins, creating conditions for tighter market supply.

After the Russian-Ukrainian conflict broke out, Europe was no longer able to rely on Russian supplies; now it has to compete with Asia for liquefied natural gas goods from exporters such as the US, Qatar, and Nigeria. The Fund's bullishness about European gas reached its highest level since the energy crisis began, indicating growing fears that supply will become scarce.

Jennifer Francis (Jennifer Francis), a senior scientist at the Woodwell Climate Research Center (Woodwell Climate Research Center), said, “There will almost certainly be a series of debilitating heatwaves this summer, especially in central America and Europe.”

Southeast Asia began to experience extremely hot weather in April, prompting traders in the region to buy large quantities of natural gas goods. Hot weather has also hit Egypt, forcing the quintessential exporter to buy liquefied natural gas. Akshay Kumar Singh, CEO of India's Petronet LNG Ltd., said India's sweltering weather has stimulated demand for fuel in the electricity sector. CEO Akshay Kumar Singh (Akshay Kumar Singh) said.

Citigroup analysts said in April that in Europe and Asia, “perfect storms” such as extreme heat, interruptions in US exports due to hurricanes, and a reduction in hydropower generation in Latin America due to intensifying droughts may cause gas prices to soar, making prices about 50% to 60% higher than current levels.

Extensive power outages

The electricity market also faces similar risks from surging demand. Soaring temperatures across Texas are testing the state's power grid. Electricity prices in August recently soared to more than $200 per megawatt-hour, setting the highest electricity price at this time of year since 2022. The current upside risk is huge: in August of last year, electricity prices climbed more than 800% under the heat. Over the past two summers, the state has been on the verge of widespread power outages several times.

In Europe, blazing heat may force some French nuclear power plants to shut down, and these nuclear power plants account for about 70% of the country's electricity generation. This is because many reactors rely on rivers for cooling, and environmental rules protecting aquatic wildlife force these facilities to temporarily shut down when the water gets too hot.

The threat of inflation is making a comeback

Predictions that commodity prices will remain stubbornly high will continue to thwart the Federal Reserve's fight against inflation and increase the risk that interest rates will remain high for a longer period of time. Biden is also concerned about the outlook ahead of the US presidential election, as the cost of living will be the focus of voters' attention.

Meanwhile, according to a study by the San Francisco Federal Reserve, extreme heat will limit the productivity of construction workers and curtail capital investment, thereby stifling the US economy.

The paper found that without large-scale measures to reduce carbon emissions, future increases in intense heat will reduce capital stock (that is, cumulative investment value) by 5.4% and annual consumption by 1.8% by 2200.

Supply shocks sweep agricultural markets

Supply shocks are the biggest threat to agricultural markets.

Wheat futures hit their highest point since July last year, and the fund is cutting bearish bets they have held for almost two years. Dry weather in Russia, a major global exporter, is prompting analysts to lower harvest expectations. Field work in Western Europe has slowed due to excessive rainfall, while Ukraine's agricultural infrastructure has been attacked, threatening exports.

In North America, much of Kansas, the number one producer in the US, is experiencing extreme droughts. So far, this year's crop survey estimates show that the yield of wheat fields in the state will exceed 2023. The drought conditions at that time were so severe that many wheat fields did not have time to be harvested. However, there is still more than a month until the wheat fields are harvested. If the weather is drier or the heat is unbearable, the yield will drop from what was predicted.

Dave Green (Dave Green), executive vice president of the Wheat Quality Council (Wheat Quality Council) and head of the crop research team, said, “If we want to get the predicted amount of harvest, it's best to start raining soon.”

Extreme weather is one driving force behind Cocoa's dazzling rise, and the coffee market now faces similar risks.

Citigroup analysts said this month that if unfavorable weather and production problems occur in Brazil and Vietnam, and capital managers go on a buying spree, then the futures price of Arabica coffee, a high-end coffee bean favored by Starbucks and other companies, may jump by about 30% over the next few months to reach 2.60 US dollars per pound.

Oil options trading explodes

Extreme heat affects every corner of the oil market, from production to transportation and refining.

Last year, Canada experienced its worst wildfire season in history, causing oil and gas drillers to shut down production by up to 300,000 barrels per day. In 2023, the fires hardly affected major production areas in Canada, but the impact this year could be huge.

According to data from the North American Drought Monitoring Station, at the end of April, 63% of the US region was abnormally arid or in a dry state, creating mature conditions for fires to occur.

Strong high temperatures can disrupt the operation of refineries, put pressure on process equipment, and affect the ability to maintain a stable internal temperature. If the grid is overloaded and the facility loses power, the refinery will shut down completely.

Hot weather can also cause steam to build up, which can damage crude oil pipelines. Additionally, some traders are preparing for an unusually active hurricane season, which is another threat facing refineries.

Fund managers' net bullish bets on US gasoline futures and options have retreated from their peak after reaching their highest seasonal level since 2019.

Transportation bottlenecks add uncertainty

Tanker transportation may also be affected, and the drought may cause transit problems in key waterways such as the Suez Canal.

The Rhine is Europe's busiest commercial waterway, transporting various goods from diesel to coal from the Dutch Palembang of Rotterdam to the interior.

Carl Neill (Carl Neill), a senior energy analyst at StoneX Group, said that the threat of severe weather will keep commodity traders alert in the coming months.

“Uncertainty brings instability,” Neill said. “How will high temperatures affect summer crops? Can gas stocks be injected at a rate that can keep up with cooling requirements? The market is starting to price this uncertainty.”