THE OLD
It is my belief that priced into the market are bearish supply side fundamentals. Robust supply and constraints on demand contributed to record-low prices. over the last two years. Recently, mild autumn weather persisted in the first half of November, limiting natural gas consumption for heating. U.S. inventories ended the injection season on October 31 at 3,922 billion cubic feet, and the U.S. natural gas market enters the winter of 2024–25 with the most natural gas in storage since 2016 per Department of Energy. Flat U.S. net natural gas exports and limited U.S. liquefied natural gas capacity additions this year also curbed demand and weighed on prices, while the forecast marketed U.S. natural gas production to average 113 billion cubic feet per day in 2024, relatively unchanged from 2023’s record high. These realities have been and are priced into the market currently in my opinion. However, the war between Russia and the Ukraine is still escalating. Recently we saw that Russia carried out a massive missile attack on Ukraine and hit energy and grain terminal targets. In response Ukraine claimed responsibility for the assassination of Russia’s head of biological and Chemical forces Igor Kirillov. Reuters previously that Moldova’s parliament voted early on Friday to impose a national state of emergency for 60 days starting on Dec. 16 due to an expected cut-off of Russian gas supplies from Jan. 1. Fifty-six members in the 101-seat chamber backed the measure in the vote just after midnight following Prime Minister Dorin Recean’s call for approval to ensure Moldova’s separatist Transdniestria region secured the gas it needed. U.S. LNG export capacity is poised to double in next 5 yrs according to S&P Global. They say it will support 500,000 jobs per year and add $1.3 trillion to GDP by 2040. The US has some of the cheapest natural gas prices on the planet and is going to encourage even more jobs and manufacturing to come back to the United States.
Current
Outgoing Energy Secretary Jenneifer Granholm was quoted two days ago with this after a recent study regarding the future of natural gas exports. “The U.S. Department of Energy’s (DOE) updated study finds that a wide range of domestic consumers of natural gas – from households to farmers to heavy industry – would face higher prices from increased exports. The study put forward today finds that unfettered exports of LNG would increase wholesale domestic natural gas prices by over 30%. Unconstrained exports of LNG would increase costs for the average American household by well over $100 more per year by 2050. We have recently lived through the real-world ripple effects of increased energy prices domestically and globally since the pandemic. Middle and low-income households already face energy bills that are too high. In parts of the South, the export-induced price increase would put some households over the energy burden threshold, further challenging their ability to meet basic needs.”
However, there was a lot of industry pushback against the Secretary’s findings and the Biden administration. In response the American Gas Association said “The Biden Administration’s pause on American LNG exports was a mistake that resulted in uncertainty for the market, for investors, and for America’s allies around the world,” said AGA President and CEO Karen Harbert. “This report is a clear and inexplicable attempt to justify their grave policy error. America’s allies are suffering from the weaponization of natural gas and energy deprivation and any limitations on supplying life essential energy is absolutely wrong-headed. We look forward to working with the incoming administration to rectify the glaring issues with this study during the public comment period.
The North America Electrical Reliability Corp. or NERC said “Trends identified in NERC’s 2024 Long-Term Reliability Assessment that warns that over half of the continent is at elevated or high risk of energy shortfalls over the next 5 to 10 years. They warn that generator retirement plans continue over the next 10 years, electricity demand and energy growth are climbing rapidly. New data centers, which have the potential to consume enormous amounts of power and can be built relatively quickly, are driving much of the explosive demand growth. Electrification in various sectors and other large commercial and industrial loads, such as new manufacturing facilities and hydrogen fuel plants, are factoring into higher demand forecasts. In fact, they point out that, “Demand growth is now higher than at any point in the last two decades, and meeting future energy needs in all seasons presents unique challenges in forecasting and planning,”
THE NEW
My prediction is that natural gas demand could soar in the coming years on three fronts. First, prior restrictions on US LNG, maybe lifted with the Trump administration coming in that could significantly narrow the spread of US LNG vs elevated pricing in the EU. Second, potential technological advances that could require more power. specifically, the build out of terminals and data centers amid a surge in crypto mining. Third, the possible furthering of escalations of geo-political tensions in Eastern Europe and the Middle East. We are always looking for cheaper costs to entry with the appropriate risk to reward scenarios. It is my belief that LNG or natural gas has a story. There is a new administration coming to town that may ignite demand over time. We could see futures markets in the deferred natural gas option markets trade significantly higher in the next 24 months. We could also see them go sideways to lower. No crystal ball here. However, I’m bullish energy on a few fronts further out on the calendar and think one should at least consider one of the natural gas trades or both.
Two Trade Ideas – Call to Action
Conservative
Sell the 6.00 /5.00 put spread October Natural gas for 9.50. One is collecting 9500 upon entry minus commissions and fees.
Risk: $350 from entry plus trade costs and fees. Work an order to buy back at 4.50 for a collection of 5K minus trade costs and fees.
Aggressive
Sell the Feb Nat Gas 3.00/2.90 put spread for a $450.00 collection. Use the Credit to buy the Sep 25 5.00/6.00 call spread. We are entering into this trade at zero dollars or even money, plus 4 commissions and fees. One is out of harm’s way as far as risk is concerned if the underlying February natural gas futures settles above 3.00 on January 28th which is when February Natural gas options expire.
Risk: The max risk here is 1K per spread, plus all trade costs and fees.
Sean Lusk
Vice President, Walsh Commercial Hedging Services
Direct: 312-957-8103
888.391.7894
Fax: 312.256.0109
[email protected]