Strong El Niño event will have wide-ranging impacts on energy

The onset of the weather conditions known as El Niño was identified in the Pacific Ocean last month, with wide-ranging implications for energy.

An El Niño can cause heatwaves and droughts in some places, heavy rain or cooler weather in others, and a temporary rise in global temperatures. The World Meteorological Organization forecast last week that the coming El Niño would be a strong one, creating an increased likelihood of extreme weather.

News outlets have been talking about a “super El Niño”, a term that has no formal definition and is not used by most scientists. But the US National Oceanographic and Atmospheric Administration said this week there was an 81% chance of a “very strong” El Niño in the last quarter of this year. If that happens, it would rank among the largest El Niño events in the historical record, which goes back to 1950.

El Niño conditions emerge when the trade winds that blow from east to west in the Pacific slacken off, and warm water surges eastwards towards South America. They happen on an irregular cycle, typically every two to seven years, alternating with the opposite phenomenon – cooler water and stronger trade winds – known as La Niña. The complete system is called the El Niño Southern Oscillation, or ENSO.

The scale of the ENSO is so vast that it can affect weather conditions from India to Europe, but its strongest impacts are generally felt in the Americas. Each El Niño is different, but they are typically associated with milder and drier winters in the northern US and Canada, and heavier-than-average rainfall in the southeastern US.

For the energy industry, that creates effects on gas demand and solar, wind and hydro power. Changes in cloud cover, wind speeds, precipitation and snow melting can have significant impacts on renewable generation.

The 2023-2024 El Niño reduced wind output in the central US and solar output in California, as well as causing steep falls in hydro generation in China and India. It also made that winter the warmest on record for the Lower 48 states of the US.

An El Niño can also affect international trade in energy. The Panama Canal system relies on lakes for water management, particularly the artificial Gatun Lake. The severe drought in the region in 2023-2024, driven in part by the El Niño, forced the Panama Canal Authority (ACP) to issue a series of restrictions on the size of ships that could use it.

The maximum allowable draft in the canal’s Neopanamax locks, which is typically about 15 metres, was reduced to below 14 metres for most of the second half of 2023 and the first half of 2024. At times, it dropped as low as 13 metres 26 centimetres.

Those restrictions forced many vessels to use alternative routes. LNG carriers heading for Asia had to go round the Cape of Good Hope or eastwards via the Suez Canal, adding two or three weeks to their journey times.

The ACP said last week that because of expected weather conditions, including the approaching El Niño, it was again cutting the maximum allowed draft. However, for now, the new limits remain higher than in 2023-2024: the maximum is currently about 14.9 metres, falling to 14.5 metres on 15 August.

The ACP has invested in water-saving measures, with the aim of offering a normal service even if there is a drought. The next 12 months will put to the test how effective those measures have been.

The Wood Mackenzie view

The potentially far-reaching impacts from El Niño conditions mean that the weather system is being followed across several different teams at Wood Mackenzie, including power, gas and maritime.

Eldon Lopes, a research manager in our power markets intelligence group, is tracking the impacts across a number of different dimensions:

• Temperatures: We expect warmer-than-normal weather in the Southern Hemisphere summer, and a mild winter in the northern US and Canada. But there are likely to be cooler conditions across the southern tier of the US and Mexico, and most of Asia, in the Northern Hemisphere winter and spring.
• Precipitation: Very wet conditions are expected for the southern tier of the US and Mexico, the Middle East, North Africa and Asia, especially China. Conversely, the El Niño means dry weather for equatorial South America and South Asia.
• Solar generation: The conditions are bullish for output in the US east of the Rockies, in Iberia, and in the Middle East in the autumn, Western Australia in the winter, and northeast South America and India in the spring. Overall, however, El Niño is generally bearish for most of the world over the next three seasons.

Scientists have suggested that the stronger the El Niño, the greater the impact on solar generation. If the current event turns out to be as strong as the forecasters suggest, the hit to solar output in the south and west of the US could be the largest yet seen.

The challenges and opportunities created in energy markets will be complex. Eugene Kim, Wood Mackenzie’s research director for American gas, notes that a strong El Niño could mean a mild winter for 2026-2027 in the northern US, and possibly Europe, too. That could be important for gas demand.

As for shipping, Matthew Wheatley, a research director in our maritime team, urged operators to plan for possible disruption. “In an El Niño year, preparation is not optional,” he wrote in April. “It is the cost of maintaining operational continuity.”        

As energy systems around the world evolve, with greater reliance on weather-dependent renewable generation, events such as an El Niño become increasingly significant. Climate change means that physical risks to assets caused by extreme events such as storms and wildfires may be changing, too.

The World Meteorological Organisation says there is no evidence that climate change increases the frequency or intensity of El Niño events. But a warmer world can amplify its associated impacts

Energy companies will need to be alert to the impacts of this El Niño as it strengthens over the coming months. Follow us or get in touch to understand all the key consequences as the weather conditions change .

Gulf conflict flares up, but no return to war

The uneasy peace between the US and Iran was tested during the week, with both sides launching attacks on targets in and around the Gulf. But the flaring up of the conflict has not yet progressed to full-scale hostilities.

Iran hit three tankers with projectiles, possibly because they were not using its approved route for transits through the Strait of Hormuz. The US responded by striking about 90 targets in Iran. It also cancelled a temporary waiver that had been issued to allow Iran to sell its oil for 60 days without facing sanctions. Iran said it had targeted US bases in Bahrain, Kuwait and Qatar in response.

President Donald Trump said the Memorandum of Understanding (MoU) he had agreed with Iran in mid-June was now “over”. He added: “As far as I’m concerned, it’s just a waste of time dealing with them. They’re liars.”

However, the talks between the two sides have continued. US officials reportedly said they were still trying to work towards a long-term peace.

Shipping traffic in the strait has slowed, but has not dropped back to its levels at the height of the conflict. Wood Mackenzie’s Vesseltracker service identified about 50 vessels per day passing through the strait this week. That is well down from about 170 a day before the war, but higher than the 10 to 20 a day that made the transit between the start of the war and the MoU agreement.

Tanker movements through the strait might not be expected to return to pre-war levels, even if Gulf production is fully restored, because Saudi Arabia and the UAE have increased oil exports via alternative routes.

Reuters reported that Saudi Arabia is considering increasing the capacity on its key alternative export route: the East-West pipeline, which runs across the country to Yanbu on the Red Sea coast.

Falling oil inventories have underlined the risks to the global economy if the disruption to Gulf exports persists. The amount of crude held in the US Strategic Petroleum Reserve has fallen to its lowest level since 1983, after dropping by 6.2 million barrels last week.

Prices for oil and gas rebounded this week as a result of the latest tensions, but the moves were sharper for European gas than for oil. On Friday morning, European benchmark TTF gas for August delivery was trading at the equivalent of about US$16.50 per mmbtu, up about 15% since 1 July. Front-month Brent crude was about US$76 a barrel, up 4% over the same period.

In brief

The US government’s latest Transmission Needs Study has been published by the Department of Energy, warning of increasing operational challenges for the grid. The report, published every three years, is intended to assess the needs of the electricity system to help industry and the public identify solutions.

It cites growing and increasingly complex problems for the grid, including load growth driven by new data centres, cyber security and physical risks. Aging transmission infrastructure and a changing generation mix compound the challenges the system faces.

The White House has been promoting a chain of 25 filling stations, branded Freedom Fuel, selling cut-price gasoline. The stations, all in the Philadelphia area, have been offering gasoline at US$3.47 a gallon, about 50 cents a gallon below the average for the state of Pennsylvania. How the chain is able to undercut its competitors was not immediately clear.

Other views

Will falling populations reshape energy demand? – Simon Flowers, Prakash Sharma, Peter Martin and Gavin Thompson

The Hormuz shock: what the data reveals about global oil markets in 2026 – Alan Gelder and Jim Mitchell

The era of US$2–4/mmbtu Henry Hub natural gas prices is ending

Glass half full: building a decarbonised US power sector – Lily Bermel

Electric vehicles are a defence technology – Greg Pollock and Joshua Busby

Rolling in the deep – Kimmeridge Fundamental Research

Quote of the week

“Today, oil and gas still accounts for 75% of the UK’s energy needs. It heats our homes, it keeps our hospitals and schools open, it moves people and goods around. Already half of our gas is imported, costing the taxpayer about £60 billion a year. So the question isn’t: do we need this? It’s: where do we source it from?

“The projects that we talk about, the Jackdaw and Rosebank projects, have been quite totemic around this whole pretty toxic discussion around the future of our energy needs. But the reality – the inconvenient truth for climate activists – is that we’re simply bringing it in from outside, instead of producing it domestically. And that’s just nothing more than unilateral virtue signaling.”

Russell Borthwick, chief executive of the Aberdeen & Grampian Chamber of Commerce, went on BBC Radio to make the case for a more pragmatic UK energy policy.

Chart of the week

This comes from Wood Mackenzie’s mid-year report on carbon policy and carbon markets. It shows carbon prices in four key markets in North America and Europe: the EU’s Emissions Trading System, the US Regional Greenhouse Gas Initiative (RGGI), and the Cap-and-Invest programmes for California and Washington state.

The standout market is RGGI, where prices have risen about 76% year-to-date, rising above California’s carbon price for the first time. One factor behind rising RGGI allowance price was anticipation of Virginia’s re-entry into the market, which took effect on 1 July.

The AI boom is driving strong power demand growth in Virginia, which is the world’s largest hub for data centres. A significant proportion of that additional demand is expected to be met by fossil fuel generation, creating additional demand for emissions allowances.