The following is my analysis of current global trends and how they may impact the natural gas market. The real driver of economic growth over the past century has been technology. There has over the past two decades a push by G7 nations to look for alternative and renewable energy sources and eliminate their reliance on fossil. Europe has been most aggressive in this quest. They have gone all in on alternative energy and away from fossil and nukes. Their aggressive stance in the last two decades where wind and solar and other renewables were relied upon were ultimately not enough to fill the void which resulted in very high energy costs that had dire economic consequences. For example, VW is shutting factories and laying off thousands in the EU. This is most visible in Germany resulting in higher energy costs which in my view have caused factories and jobs to leave Germany. This will not be easily reversible in the short run. The potential exists that the EU will have a slow economy and continuing problems as they will be slow to shift back to liquified natural gas which in my view is the answer to the cost of energy. Without cheap and readily available reliable energy economies cannot grow in my opinion. The innovations in receiving faster information are changing everything. AI is making it possible to make information available at the click of the mouse, and to the extent never before possible. It will mean a speeding up of solutions to all sorts of problems and advances never before possible. The demand for data centers is now huge, and that means the demand for power is increasing by multiples. Cloud is now the biggest infrastructure ever built. Anywhere from 75 to 90 percent of silicon comes from China and it is produced in coal fired plants. The concerns of the Street that the massive investments by the big tech companies in data centers and cloud computing will not pay off, fail to grasp the revolution now underway and the need for even more data centers. They don’t understand the foundation is being built for many wonderful inventions and knowledge expansion that will drive the new industrial revolution. AI will create new, but different jobs like every other major innovation throughout history, only far faster.
So, the side effect. The demand for data centers is now huge, and that means the demand for power is increasing by multiples just as those promoting the green agenda want to shut down power plants and end the main fuel for power generation. With Trump now back in office come January 2025, its time we look at some longer-term investments using options on futures on two fronts. First, it is my belief that Israel will now be free to take out the Iran oil and nukes and to force regime change in Iran. There will be no cease fires until Israel is secure in Gaza, Lebanon and Iran, and Syria and Iraq become at least not complicit in attacking Israel. Second, gas powered power plants will now get built as they are much faster to build and easier and less costly. Nukes will have a place, but the tech data centers will do what Musk did and build their own gas turbine power generation. There could be a doubling of peak electric demand. Due to prior efforts of building alternative power generation and the push for wind and solar, the system is far less reliable so there is now huge volatility in the wholesale power trading market. This could be a trader’s dream. Prices are very volatile which makes huge opportunities for huge trading profitability in my opinion which is now being harvested by the likes of major Wall St firms who have the expertise. The one issue that needs to be resolved is the building of gas transmission lines to all of these new power plants to serve the data centers. Orders for gas turbines are now booked through 2027, so manufacturers of these machines will profit very nicely.
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. 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 either the following aggressive or conservative trade in natural gas options.
Trade Idea – Conservative
Buy the October 2025 475/575 call spread. Pay 4 points or $400 per spread plus trade cost and fees.
Risk – The risk is the price paid here which is $400 plus trade costs and fees. The maximum one would collect is 10K minus trade costs and fees. That would only occur if Nat Gas settled over 5.75 in late September 2025.
Trade Idea – Aggressive
Buy the October 475/575 call spread while selling the Jan 25 275/265 put spread. Suggested cost to entry at even money plus all trade costs and fees.
Risk – the maximum risk is 1K plus all trade costs and fees. The strategy here you are selling a put spread with a max 1K plus loss per spread plus trade costs, to finance and Oct 25 475/575 call spreads. Should the underlying January options that expire in late December 24, worthless, one is free and clear of the maximum risk and is long a call spread deep into 2025.
Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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