A strong El Nino does not necessarily suppress US natural gas equities

Overview

This report focuses on a market concern: whether a strong El Nino could lead to a warmer US winter, reduce heating degree days (HDDs), and thereby weaken natural gas demand and the performance of gas-related equities. Bernstein's core answer is no. The report acknowledges that Pacific Nino 3.4 sea surface temperatures are at record highs for July and that NOAA expects El Nino to last at least through March and likely reach a “very strong” level, but through analysis of the historical relationship between RONI and HDDs, regional breakdowns, and extreme-year samples, the authors conclude that a strong El Nino has no predictable impact on this winter's HDDs.

Core views

The report’s core view is that winter natural gas demand does indeed depend heavily on weather, and HDDs strongly explain residential and commercial heating gas demand; however, the intensity of El Nino itself cannot reliably predict winter HDDs for the overall US or key northern regions. The authors argue that the market’s logic of “strong El Nino equals warm winter, warm winter equals weaker natural gas demand” is not supported by a sufficiently strong chain of evidence. Therefore, until further disproven, a strong El Nino should not be viewed as a key risk to Bernstein’s bullish view on natural gas and natural gas equities.

Analysis framework

The report first uses NOAA and sea surface temperature data to confirm the intensity and persistence probability of El Nino, then explains how HDDs and CDDs are driven by temperature and describes the relationship between HDDs and winter natural gas demand. It then uses RONI as a measure of El Nino intensity and compares it with overall US winter HDDs, East North Central winter HDDs, and historical extreme warm-winter samples to determine whether a stable relationship exists that could be used for investment judgments. Finally, the report briefly estimates the magnitude of anthropogenic climate change’s impact on winter HDDs in recent years and concludes that its effect on natural gas demand during the short-term holding period is limited.

Methodology notes

• Meteorology and energy demandHDD/CDD demand framework

  Heating degree days and cooling degree days

  HDD equals 65 degrees Fahrenheit minus the daily average temperature, with values below zero recorded as zero; CDD equals the daily average temperature minus 65 degrees Fahrenheit, with values below zero recorded as zero. The report emphasizes that HDDs strongly predict winter residential and commercial natural gas demand.

• Climate indicatorRONI and El Nino intensity

  Relative Oceanic Nino Index

  The report uses RONI to track El Nino-related sea temperature anomalies and compares it with winter HDDs in both cross-sectional and time-series analyses.

• Statistical testingCorrelation and extreme-value testing

  Correlation between winter RONI and HDDs

  The report examines winter averages for the overall US and the East North Central region, and further reviews the four historically warmest winters, concluding that there is no stable, statistically significant, or predictive negative correlation.

• Climate scenarioIPCC SSP2-4.5 scenario

  Impact of long-term climate change on short-term HDDs

  Using SSP2-4.5 as an approximate scenario, the report estimates warming of about 0.06 degrees Fahrenheit per year over the next 24 years, implying an impact of about 9 HDD points on a single winter season. Relative to an average winter HDD level of about 3,600, this is roughly 0.3%, and therefore has limited impact on near-term natural gas demand forecasts.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• EQT

  US E&P equity sensitive to natural gas prices; the report reiterates Outperform

  Strengths

  If a strong El Nino does not materially depress HDDs, resilience in winter natural gas demand would support the bullish thesis.

  Weaknesses

  Sensitive to winter weather, natural gas prices, and supply-demand expectations.

  Comparison

  In the report’s context, it is one of the core bullish natural gas equities.

  Risks

  If the actual winter is significantly warmer and HDDs fall below levels implied by historical relationships, natural gas demand and the share price may come under pressure.

• EXE

  Natural gas-related E&P equity; the report reiterates Outperform

  Strengths

  The target price implies substantial upside versus the current price, and the report believes El Nino concerns are insufficient to weaken the bullish view.

  Weaknesses

  Valuation and earnings expectations are affected by natural gas price volatility.

  Comparison

  Alongside EQT, it is one of the main natural gas equities on which the report reiterates Outperform.

  Risks

  If the market continues to price a strong El Nino as a warm-winter risk, short-term sentiment may fluctuate.

• DVN

  A large-cap oil and gas E&P equity with relatively high leverage to US natural gas prices; rated Outperform

  Strengths

  Among large-cap oil and gas E&Ps, it has relatively high sensitivity to US natural gas prices, which would be beneficial if gas prices are supported by resilient demand.

  Weaknesses

  Compared with pure-play gas companies, it is still affected by oil prices and broader integrated E&P valuation factors.

  Comparison

  The report specifically notes that DVN is the most sensitive large, oil-leaning E&P in its coverage to US natural gas prices.

  Risks

  Dual volatility in oil and gas prices, winter weather, and natural gas demand coming in below expectations.

• US natural gas

  The core commodity and equity driver analyzed in the report

  Strengths

  Winter HDDs strongly explain demand, and the report finds no evidence that a strong El Nino can reliably suppress HDDs.

  Weaknesses

  Demand still depends heavily on actual weather, and prices are sensitive to inventory and supply changes.

  Comparison

  The report places the relationship between natural gas demand and HDDs ahead of El Nino sea temperature indicators.

  Risks

  If the warmer seasonal outlook in NOAA forecasts materializes, heating demand could weaken.

Key data

• NOAA El Nino probability100% through at least March 2027The report cites NOAA's probability assessment to show that El Nino persistence is very strong.
• Expected sea temperature anomalyAbout 2 to 2.5 degrees Celsius above the normal baseline, with a three-month average of about 2.2 degrees CelsiusThe report considers this a rare but not unprecedented strong El Nino level.
• Overall US RONI-HDD relationshipNo correlation observedThe report reaches this conclusion after focusing on winter averages.
• East North Central RONI-HDD relationshipNo statistically significant correlationThis region is used to test whether higher-latitude US regions are more affected by El Nino.
• Extreme warm-winter sampleThe four warmest winters failed to predict lower HDDsThe report uses extreme-value testing to supplement the correlation analysis.
• EQT rating and target priceOutperform, target price USD 69.00, current price USD 53.39From Bernstein ticker table.
• EXE rating and target priceOutperform, target price USD 160.00, current price USD 91.73From Bernstein ticker table.
• DVN rating and target priceOutperform, target price USD 59.00, current price USD 45.29The report says DVN is among the large-cap oil and gas E&Ps in its coverage most sensitive to US natural gas prices.

Impact & implications

The investment implication is that if investors reduce winter natural gas demand expectations or avoid natural gas equities because of a strong El Nino outlook, the report argues that this logic lacks historical statistical support. The key drivers for natural gas equities remain actual winter HDDs, inventories, supply-demand balance, and price performance, rather than the El Nino label alone. This conclusion supports continuing to hold or monitor upstream companies sensitive to US natural gas prices, especially EQT, EXE, and DVN, which are reiterated or specifically highlighted in the report.

Risks

• Actual winter weather may be significantly warmer, causing HDDs to fall below historical averages and suppress natural gas demand.
• The historical relationship between El Nino and HDDs is unstable and does not mean this cycle cannot produce negative weather effects.
• Natural gas equities remain affected by inventories, supply, prices, valuation, and macro risks.
• NOAA's seasonal outlook already indicates a warmer bias for winter temperatures in the northern half of the US, which could affect market sentiment if realized.
• Although the report views the long-term impact of climate change as small in the short term, the long-term structure of energy demand could still change.

What to watch

• The deviation of actual 2026 winter HDDs from historical averages and market expectations.
• Subsequent NOAA ENSO intensity probabilities and the trend in Nino 3.4 sea surface temperatures.
• Actual temperature performance in the northern half of the US and the East North Central region.
• Natural gas inventories, production, LNG exports, and residential/commercial demand data.
• The share-price elasticity of EQT, EXE, and DVN to changes in natural gas prices.