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 Banks and traders are reporting outsized profits, and losses, on
everything from natural gas to grains as severe weather causes extra
price volatility; power grid operators are struggling with bouts of
extreme cold or droughts that crimp supplies while demand spikes;
and more and more retailers and manufacturers are using forecasts to
manage inventories.
Traditional meteorologists, who look at current weather patterns to
make forecasts, have long derided examining historical temperatures
as "climatology", of limited use, at best, when trying to predict
the future.
But applied mathematicians, some of whom once worked on Wall Street
as market-predicting "quants," see the future in patterns of
historical data. After years of tinkering, they say their weather
algorithms can blow away traditional forecasting.
"It has taken me two solid decades to get something useful," said
data miner Ria Persad, the president of StatWeather.
"Weathermen are looking at what's happening now - they are looking
at current data to get to the future," said Persad. "They aren't
actually studying this 120 years of data log to extract patterns
like we are to draw statistical lessons."
Persad looks far ahead: she sees the California drought persisting
until late 2015, so far into the future as to draw scoffs from some
practitioners.
Traditional meteorologists use computer models as well, and some see
value in mixing historical data with what is happening outside their
window, but they are skeptical of relying too heavily on the past.
"We only have data for the last 100 years, which is 100 winters,
which is a really small sample size. It would work if we had 1,000
years or 10,000 years of data, but we don't," said Mike Halpert of
the National Oceanic and Atmospheric Administration's Climate
Prediction Center.
"This is kind of like being a gambler in Las Vegas, on any one hand
you may lose," he added, declining to discuss StatWeather
specifically.
Halpert, however, had predicted this past winter was going to be
warmer than normal. Instead, it was unusually cold - just as
StatWeather predicted. Only about 20 percent of commercial
forecasters saw the colder winter coming, Persad said.
StatWeather nailed calls on a cold snap in late 2013 and a string of
frigid temperatures through March, surprising some in the
forecasting community and even Persad herself. She attributed
improving accuracy to her software training itself.
Another company, Global Weather Oscillations, uses historical data
to predict where hurricanes will strike land and correctly predicted
a weak hurricane season last year, unlike many rivals.
"We don't have to wait four days before a hurricane hits to do this.
We can do it eight months into the future," said Chief Executive
David Dilley, whose company sells its forecasts to insurance firms
and big retailers.
MANAGING RISKS
Climate change is already causing drier droughts, more intense
floods and wilder temperature swings across the United States, the
National Climate Assessment said in May.
The winter of 2014, when frigid temperatures roiled natural gas
markets as heating needs rose, may be a glimpse of what lies ahead.
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Major trading houses, including Morgan Stanley and Goldman Sachs,
hedge funds and energy producers made and lost hundreds of millions
of dollars as gas futures prices spiked by more than 50 percent to a
five-year high of $6.49 per million British thermal units (mmBtu) in
late February. At a delivery point into New York City, spot prices
rose 20-fold.
Oil giant ConocoPhillips posted some $200 million in profit during
the quarter from natural gas. Texas-based hedge funds e360 and
Goldfinch reportedly had gains of 14 percent and 21 percent in
January, respectively, when gas spiked.
"It was a very unusual quarter because of weather," ConocoPhillips
CFO Jeff Sheets told Reuters in May, describing a successful winter
of gas trading. He warned the results might not be repeatable.
Commodities giant Cargill Inc's quarterly earnings fell 28 percent
on market disruptions that it blamed in part on extreme weather.
Most firms active in energy markets have contracts with several
forecasting companies, paying them tens of thousands of dollars a
year.
StatWeather, which just moved to Houston from Florida to be closer
to clients, declined to detail its roster of users and several
trading houses consulted by Reuters would not identify their
suppliers.
Air Liquide, which produces and buys power to distill specialized
gases, said it relies on half a dozen suppliers - like StatWeather,
Planalytics, DTN, Wilkens and Vaisala - that track not just
temperature but also wind and in one case lightning.
The forecasts help it monitor pipeline safety, calibrate its plants
based on the price and availability of power, and gauge when the
Texas grid might suffer supply disruptions.
The suppliers distinguish themselves by forecast time frame; each is
better at viewing a particular slice of the future, said Charles
Harper, Air Liquide's global head of smart manufacturing.
As the forecast battle continues, there's one fundamental
disagreement -- whether human instinct plays a role in the science.
"You live by the model, you die by the model," said Marshall Wickman,
senior meteorologist at Wilkens Weather, a unit of Rockwell Collins.
The wise forecaster doesn't wager everything on the computer, he
believes.
"That's where the meteorologist comes in. The model doesn't do
everything. It's a guide," he said.
(Additional reporting by Jeanine Prezioso in New York and Anna
Driver in Houston, editing by Peter Henderson)
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