Extreme cold weather continues to hit North America this week. The National Weather Service stated that a low-pressure system in the southern part of New England began moving eastward over the Atlantic Ocean on Monday, bringing heavy snowfall to parts of the northeastern United States, while some areas in the Mid-Atlantic region will experience freezing rain. Affected by this, the production capacity of the U.S. oil and gas exploration industry has dropped significantly. The main natural gas futures contract surged more than 25% intraday, which also pushed up electricity prices. As industries such as shipping and freight are affected, the U.S. economic growth rate in the first quarter may be significantly impacted.
Affected by the winter storm sweeping across the United States, the country's energy infrastructure and power grid are under pressure. Institutions predict that U.S. crude oil producers' daily output decreased by up to 2 million barrels during last weekend, accounting for about 15% of the country's total crude oil production.
Energy Aspects, an energy consulting agency, predicts that the shutdowns and production cuts of U.S. crude oil reached a peak last Saturday, with the Permian Basin accounting for the largest proportion of the cuts, and the estimated daily output plummeted by about 1.5 million barrels. The production cuts eased somewhat on Monday, with the current daily crude oil production reduction in the Permian Basin being approximately 700,000 barrels, and it is expected that local production will fully recover by January 30.
Chevron disclosed in a regulatory filing that during the storm last Sunday, the hatches at its facility in Midland, Texas, froze and became blocked, making them unable to close. Several refineries along the U.S. Gulf Coast also reported operational issues caused by the freezing weather. Exxon Mobil has shut down some production units at its petrochemical complex in Baytown, Texas, east of Houston.
Extreme cold weather has caused 12% of U.S. natural gas production capacity to be shut down. According to data from the London Stock Exchange, so far in January this year, the average daily natural gas production in the contiguous 48 U.S. states has dropped from a record high of 109.7 billion cubic feet in December last year to approximately 106.9 billion cubic feet. Among them, the single-day production last Sunday fell to 92.6 billion cubic feet, a new two-year low. Natural gas wells in Texas and Louisiana have been the most severely affected, with production dropping by more than 17 billion cubic feet per day from the peak in mid-January.
At the same time, the demand for heating and electricity has surged significantly.
U.S. natural gas futures prices surged more than 25% on Monday, breaking through $6.5 per million British thermal units, hitting a new high since 2022. Affected by the extreme cold wave impacting both supply and demand sides, natural gas prices have started this weather-driven upward trend since last week, with a cumulative increase of more than 100%. Previously, last week, U.S. natural gas futures prices had soared nearly 70%, setting the largest weekly gain since records began in 1990.
As of Monday, approximately 810,000 users across the United States remained without power. PJM Interconnection, the largest grid operator in the U.S., projected that the scale of power production disruptions on Monday would rise to 22.4 gigawatts, accounting for about 16% of its total committed power supply capacity. Data from PJM Interconnection indicated that the power outages were mainly concentrated in the mid-Atlantic service area of the United States served by Dominion Energy.
The wholesale spot price of electricity in the United States is usually around $200 per megawatt-hour. Over the past weekend, it exceeded $3,000 per megawatt-hour in some areas, surging by 1,400%. On Monday, the next-day electricity price in New England soared by about 82% to $313 per megawatt-hour; the electricity price in the PJM Western Grid covering Pennsylvania and Maryland even skyrocketed by approximately 360% to around $413 per megawatt-hour, hitting a new high since January 2014.
Economic Impact
As a strong winter storm sweeps across most parts of the United States, freezing rain and heavy snowfall have disrupted travel and paralyzed transportation networks. Major airlines were forced to cancel thousands of flights on Monday, with a large number of other flights experiencing delays.
Data from the flight tracking website Flight Tracking Network shows that as of Monday afternoon, approximately 5,300 flights across the United States have been canceled and more than 4,300 flights have been delayed. Data from aviation data analysis company Cirium indicates that over 11,000 flights were canceled in the United States last Sunday, setting the highest single-day flight cancellation record since the pandemic.
The storm has also impacted freight operations. Package delivery giant UPS stated that severe weather may have caused service disruptions in some areas and warned that its air freight network could face further impacts, including the freight hub in Louisville, Kentucky. Burlington Northern Santa Fe Railway also said last week that it had prepared for potential operational disruptions caused by the storm.
It is worth noting that the severe weather may cause subsequent damage: U.S. economic growth in the first quarter may be significantly hit as a result. Affected by the subsequent cold wave, the ripple effects of the storm may last for up to a week, which further increases the difficulty of interpreting the current economic situation.
Experts from AccuWeather, a weather forecasting agency, said that the winter storm affecting more than 24 states in the United States is expected to cause initial economic losses ranging from $105 billion to $115 billion. This storm may become the most economically damaging severe weather event since the Los Angeles wildfires.
Morgan Stanley estimates that the storm named "Fern" could reduce the growth rate of U.S. first-quarter gross domestic product (GDP) by 0.5 to 1.5 percentage points. Aditya Bhave, a U.S. economist at Morgan Stanley, wrote in a report to clients: "Back then, Storm Viola caused heavy damage in the southern region, and the power grid in Texas was disrupted for a long time. However, Storm Fern has brought much more snowfall to the Northeast than ever before, and the region has a higher concentration of high-income households. Therefore, it is currently impossible to determine whether the economic losses caused by Storm Fern will be greater or smaller than those caused by Viola.
If calculated based on the estimated maximum decline, Storm Fern could wipe out most of the expected GDP growth in the US in the first quarter. Over the past four years, the US economy has grown at an average annualized rate of 2.4% per quarter, and the GDP performance in the first quarter is generally weaker than the usual level. However, economists believe that any impact of Storm Fern on the economy will not last long, and most of the consumption and business activities that failed to be completed in January will be made up by spring at the latest. "Although the storm will cause some permanent loss of output, we do not expect it to have a long-term impact on the overall economic development trajectory, and we remain optimistic about the economic trend.
Furthermore, climate factors may disrupt various key economic reports released by the U.S. government – these are important bases for investors and the Federal Reserve to judge employment, inflation conditions, and the overall economic situation of the United States. These indicators were already distorted due to the federal government shutdown last fall, and now that various government agencies have just completed data supplementation, Storm Fern has followed. Matthew Martin, a senior U.S. economist at Oxford Economics, said: "This winter storm, which is about to sweep across half of the United States, will cause significant fluctuations in U.S. first-quarter economic data."
