- The Washington Times - Sunday, November 21, 2004

NEW YORK (Dow Jones/AP) — Energy industry profits always have been exposed to the weather, but now they are even more highly exposed to weather forecasts.

The culprit? Bold private forecasters who have commanded the attention of a market unimpressed by wishy-washy government outlooks. With billions of dollars on the line, client interest has surged, and meteorologists making accurate calls are accorded star status.

Yet even as their influence has grown, private forecasters are raising some eyebrows. Critics say competitive pressure pushes them to make forecasts — particularly for the high-demand summer and winter seasons — that are more specific than the data can support, and some high-profile calls have been off the mark.

“A lot of people are skeptical of what they’ve generated, getting two out of the last three winters wrong — and this summer was a complete debacle,” said Martin King, an analyst at FirstEnergy Securities.

Last summer was one of the coolest in recent history, despite calls by many private forecasters for a heat wave, a fact that has had lasting repercussions for the energy industry.

A feared natural gas shortage because of heavy air conditioning demand turned into the largest surplus on record, suppressing prices until September.

Yet when the first winter forecasts were rolled out in October — generally calling for a cold season — prices shot up again. End-users were aghast that the winter futures for both natural gas and heating oil could hit an all-time record before the first flake of snow had hit the ground.

The uniformity of the forecasts — nearly all bullish — did produce some criticism.

“Every meteorologist I’ve talked to has called for a colder-than-average winter,” said a somewhat jaded Kent Bayazitoglu, a natural gas analyst at trading advisory firm Gelber & Associates.

Technically, the data available to long-range forecasters typically can’t support conclusions far beyond a 55 percent to 65 percent probability level.

“The key thing to know about these forecasts is that they’re statistical in nature,” said Greg Poulos, a scientist at the National Center for Atmospheric Research. “That means that, while there’s a chance those forecasts will come through, there’s also a significant chance that things go in the other direction and sometimes very much in the other direction.”

Even hotshot private meteorologists trying to make a splash with their seasonal temperature predictions readily acknowledge the difficulties.

“I realize that the final verdict of the winter is in the hands of the atmosphere, not me,” said AccuWeather Inc.’s Joe Bastardi, who regularly grades his hits and misses retrospectively for his clients. “You’re given a set of information and you have to come to a judgment.”

Mr. Bastardi is one of the most influential forecasters in the business. He is referred to as “almost a legend” by colleagues. Even false reports that he has changed his outlook tend to have a noticeable effect in the natural gas pits of the New York Mercantile Exchange.

Traders may complain, but they follow the forecasters the way fund managers buy and sell based on picks by star Wall Street analysts even as they deride the inaccuracy of past calls.

With the increased importance of weather to their bottom lines, energy producers, consumers and traders have little patience with official government forecasts that, although faithful to statistical limits, don’t make a clear call.

“Customers expect a confident answer to trade on,” said Agbeli Ameko, managing partner of weather and energy consulting firm Enercast. “They can’t trade on: ‘I don’t know, you decide.’”

Although energy traders see signs of a herd mentality among meteorologists — a case of the pot calling the kettle black, some would say — the forecasters are quick to point out nuances in different forecasts and tout their edge.

“If you’re making your living by private forecasts, you’d better be pretty … good — you’ve got the government giving away stuff for free,” Mr. Bastardi said.

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