Brace for a ‘blowtorch winter’: Super El Niño threatens Canadian gas producers and provincial coffers

An unusually warm weather pattern building in the Pacific Ocean is expected to give North America its mildest winter in modern memory, potentially cutting natural gas heating demand and squeezing revenues for producers and royalties for gas-producing provinces.

“Get ready for a blowtorch winter,” said Matt Rogers, president of Commodity Weather Group, on a call with clients.

Over the course of his decades-long career, Rogers has seen only three Super El Niños. “And the one developing in the Pacific right now will be the strongest yet.”

Rogers first tracked a Super El Niño in the 1997-98 winter. The next was in 2015-16, nicknamed Godzilla, because it was even stronger.

This year’s event has already surpassed both.

The stakes reach well beyond the weather. A mild winter could cut natural gas prices by as much as a third leaving Canadian producers and provincial governments exposed during the months when revenue and royalties usually peak.

An El Niño is a climate pattern characterized by above average sea surface temperatures in the Pacific Ocean. “Their cause is related to the geology of the Pacific and a roughly three to seven-year cycle in trade-wind behaviour,” Rogers said in an interview.

Normally, trade winds sweep westward across the Pacific, piling up warm surface water near Asia and Australia while cold, nutrient-rich water wells up along the South American coast.

A Super El Niño winter is certainly a risk and would definitely impact AECO prices

In an El Niño year, those winds slacken or even reverse, letting a massive pool of warm water build up across the central Pacific. An El Niño becomes “super” when there’s a temperature change of two degrees Celsius or higher.

This year, waters in the central equatorial Pacific, the key El Niño monitoring zone, are running five to six degrees above normal. And forecasters expect the El Niño to keep strengthening through November and December before weakening in the first half of 2027.

“The Pacific is the biggest body of water on the planet,” Rogers said. Having it this warm effectively turns the ocean into “a giant radiator,” nudging the Pacific jet stream off its usual track and reshaping weather patterns around the globe.

What also sets this year apart is a separate long-term pattern of unusually warm water in the northern Pacific, known by weather-watchers as a negative Pacific Decadal Oscillation.

Rogers said a Super El Niño has never before coincided with one of these. “It’s the combination of the two that changes the narrative,” he said.

This odd combination can simultaneously bring more snow just as an El Niño brings a milder winter, because of the effects these patterns have on the jet stream.

Regardless, milder winters mean less demand for natural gas to heat homes and businesses.

Less natural gas consumption means lower natural gas prices, leading to lower revenues for Canadian producers, though they often try to protect themselves from volatile markets by selling their gas in fixed contracts at favourable prices.

It also means less resource revenue for provincial governments like Alberta, British Columbia and Saskatchewan — Canada’s top three gas-producing provinces.

Provincial resource revenue is derived from taking a percentage, or royalty, of natural gas producer revenue.

“A Super El Niño winter is certainly a risk and would definitely impact AECO prices,” said Ian Archer, an analyst at S&P Global, referring to benchmark prices for Western Canada’s natural gas.

“But to what extent will depend entirely on actual temperatures and demand for natural gas for heating this winter.”

S&P Global’s base case forecast, which assumes a 10-year rolling average, has AECO averaging about $2.70 per gigajoule this winter. That’s 30 cents higher than the average over the past 10 winters.

The futures market is far less optimistic. Traders buying and selling contracts for gas delivered this winter are betting on a much lower price than the S&P Global base case.

Contracts for winter 2026-27 have recently averaged $1.99, a gap Archer said likely reflects the probability of a Super El Niño.

The last comparable event could offer a guide.

During the Super El Niño winter of 2015-16, AECO prices fell through the season and averaged $1.96. That’s nearly identical to what the futures market is currently predicting.

That put prices during the last Super El Niño roughly 35 per cent lower than what would be expected in more normal winters, Archer said. “This would directly translate to 30 to 35 per cent lower revenue for natural gas producers.”

Likewise is true for provincial resource revenue.

Alberta’s Budget 2026, tabled in February, assumed AECO would average $3 in the 2026-27 fiscal year, up from $1.70 the year before, largely on new demand from the LNG Canada export terminal on B.C.’s coast.

Specific gas markets are much more influenced by regional factors

The province budgeted $942 million in natural gas royalties for the year. Its first-quarter fiscal update raised that estimate to $1.3 billion, even as the government cautioned that commodity volatility could quickly change the picture.

If the futures market prediction is correct, that would leave AECO roughly a third below the province’s budget assumption during the months when demand and royalties usually peak.

Canada’s biggest natural gas producer, however, says a warm continent doesn’t guarantee a weak AECO winter.

“Specific gas markets are much more influenced by regional factors,” said Jamie Heard, vice-president of capital markets at Tourmaline Oil Corp.

Heard said the industry has seen El Niño winters that still turned out to be strong demand seasons in Western Canada.

“That’s because an El Niño can actually end up pushing cold polar air down into Canada and the northern U.S.,” said Rogers.

Tourmaline is also insulated from weak prices this winter. Heard said the company has “an extensive hedging strategy,” which spreads its sales across markets and locks in prices on part of its production.

The Alberta provincial government, on the other hand, does not have a hedging program. That’s mostly because hedging an entire government’s resource revenue over several years is hard to pull off in practice.

The positions would be so large that global commodity markets may not have the capacity to absorb them without distorting markets, and the upfront cost for things like transaction fees would be enormous.

This leaves provincial revenues exposed to the risk of wild swings in a volatile commodity market.

Even so, Archer thinks the outcome is far from settled. “Price forecasting is notoriously difficult and subject to extreme risk,” he said.

Or as Mark Twain once said, if you don’t like the weather, just wait a few minutes.