Natural Gas’s Price Is As Combustible as the Energy Commodity
Volatility in markets creates opportunity, but as risk is always a function of reward, the more the upside, the greater the potential for losses. Since natural gas futures began trading on the NYMEX in 1990, more than a few market participants have lost fortunes in the market that has traded as low as $1.02 and as high as $15.65 per MMBtu.
The high came in 2005 when a devastating hurricane destroyed natural gas infrastructure along the US Gulf Coast at the NYMEX delivery point at the Henry Hub in Erath, Louisiana. Another storm in 2008 took the price above the $10 per MMBtu level but to a lower high. Over the next twelve years, the natural gas market changed. Massive discoveries of quadrillions of cubic feet of natural gas in the US Marcellus and Utica shale regions and technological advances in fracking and extracting natural gas from the earth’s crust caused the supplies to soar and the price to decline.
Since necessity is the mother of invention, two new demand verticals developed. Natural gas replaced coal in the US for power generation. Meanwhile, turning gas into liquid for transport beyond the US pipeline network created an export market for the energy commodity.
In 2020, the price fell to the lowest level since 1995 at below $1.50 per MMBtu. Since then, the bear has transformed into a bull.
Over five times higher since June 2020
The most recent peak in the natural gas futures arena took the price to $8.0650 on April 18.
The weekly chart shows the explosive move from the $1.44 level in late June 2020 to the April 18 high, over five and one-half times higher in less than two years. Moving to a multi-year high as the peak season for demand approaches is one thing, but this rally comes as the peak season ended in March.
US LNG to Asia was sold out for more than a decade
The natural gas price in Asia has been far above US prices for years. The domestic US natural gas market’s transformation and expanding the addressable market far beyond the US pipeline network has made the energy commodity and NYMEX natural gas futures market more sensitive to international prices and supply and demand fundamentals.
Cheniere Energy (LNG) is a leading supplier of liquefied natural gas that travels worldwide on ocean vessels. In 2021, Cheniere’s CEO told CNBC that the company was sold out of LNG for more than a decade after signing long-term supply contracts with Asian consumers. Asian prices were multiples of US prices, making the business highly profitable. Cheniere’s share price has reflected the booming demand for LNG.
LNG shares rose from $27.06 in March 2020 to the most recent high of $149.42 in March 2022. At the $135.70 level on April 22, LNG shares reflect the growing demand for their energy product. While the shares and revenues exploded higher, earnings have been elusive.
The chart shows the negative earnings trend since Q1 2021. A survey of twenty analysts on Yahoo Finance has an average price target of $149.50 for LNG shares, with forecasts ranging from $61 to $180 per share.
LNG is a leader, but the EPS issue could cause the stock to become as volatile as the natural gas price over the past week.
A very volatile energy commodity
While price ranges tend to widen at higher levels, natural gas volatility was head-spinning over the past week.
As the daily chart of May NYMEX natural gas futures highlights, after trading to a high of $8.065 per MMBtu on April 18, the price moved below the $7 level on April 19. Natural gas has never been for the faint of heart as the price has ranged from $1.02 to $15.65 per MMBtu since trading on NYMEX began in 1990. However, after over a decade of lower highs and lower lows, the trend changed in June 2020.
The long-term chart illustrates the trend changed when natural gas futures moved above the 2018 $4.929 per MMBtu high, ushering in a bullish path of least resistance for the energy commodity. The quarterly price ranges since mid-2021 are the broadest since 2008, the last time the energy commodity eclipsed the $10 per MMBtu level.
Europe’s dependence on Russia causes supply issues
The previous administration warned Germany and the EU about depending on Russia for natural gas supplies. Meanwhile, US energy policy shifted from “drill-baby-drill” and “frack-baby-frack” in January 2021 when the Biden Administration began fulfilling its campaign pledge to address climate change.
Stricter regulations, canceling pipelines, and bans on fracking and drilling on federal lands caused oil and gas output to decline. While it handed the pricing power in the oil market back to the international oil cartel and Russia, it also limited Europe’s options for natural gas supplies. While the administration took a hard line against US production, it supported a Russian natural gas pipeline to supply Europe with the energy commodity.
The February 24, 2022, invasion of Ukraine changed the world. While the US, European, and other allied countries came together with severe sanctions, Europe’s dependence on Russian gas remains a window of opportunity for the Putin government. Retaliating for other sanctions, Russia is now demanding rubles for natural gas supplies, boosting the currency despite other stringent sanctions.
The US government has leaned on companies like Cheniere to divert supplies from Asia to Europe. However, the administration’s energy policy has not supported the new US terminals to liquefy natural gas and increase supply capacity. Russia remains in the driver’s seat in European natural gas requirements and is free to drive the price higher.
If prices in Europe are a guide, we could see a challenge to the 2008 and 2005 highs
At the recent $8+ high, US natural gas futures rose to the highest price since 2008. Meanwhile, European prices have screamed higher in 2022.
The long-term chart shows ICE UK natural gas futures rose to $800 in March. Before 2021, the all-time high was at the $117 level in 2005. At $171.39 at the end of last week, European natural gas prices remain at lofty levels above the pre-2021 record peak.
Natural gas has transformed into a far more international commodity. The US lost an opportunity to supply Europe and remove cash flow from Russia before the first Russian soldier crossed Ukraine’s border on February 24. The revenue from natural gas sales to Europe is funding the first major European war since WW II.
Rising natural gas prices will fuel inflation and hit consumers in their pocketbooks in the US. Natural gas is another victim of inflation, the war in Ukraine, and US energy policy. Addressing climate change is a noble cause, but fossil fuels continue to power the world. The shift from hydrocarbons to alternative and renewable fuels is a multi-decade, not a multi-month process. The economic and geopolitical landscapes and US energy policy shift ignited a very bullish fuse in a very combustible commodity. Natural gas price explosions and implosions could be the norm instead of the exception over the coming months and years.
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Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
- Over five times higher since June 2020
- US LNG to Asia was sold out for more than a decade
- A very volatile energy commodity
- Europe’s dependence on Russia causes supply issues
- If prices in Europe are a guide, we could see a challenge to the 2008 and 2005 highs
The high came in 2005 when a devastating hurricane destroyed natural gas infrastructure along the US Gulf Coast at the NYMEX delivery point at the Henry Hub in Erath, Louisiana. Another storm in 2008 took the price above the $10 per MMBtu level but to a lower high. Over the next twelve years, the natural gas market changed. Massive discoveries of quadrillions of cubic feet of natural gas in the US Marcellus and Utica shale regions and technological advances in fracking and extracting natural gas from the earth’s crust caused the supplies to soar and the price to decline.
Since necessity is the mother of invention, two new demand verticals developed. Natural gas replaced coal in the US for power generation. Meanwhile, turning gas into liquid for transport beyond the US pipeline network created an export market for the energy commodity.
In 2020, the price fell to the lowest level since 1995 at below $1.50 per MMBtu. Since then, the bear has transformed into a bull.
Over five times higher since June 2020
The most recent peak in the natural gas futures arena took the price to $8.0650 on April 18.
The weekly chart shows the explosive move from the $1.44 level in late June 2020 to the April 18 high, over five and one-half times higher in less than two years. Moving to a multi-year high as the peak season for demand approaches is one thing, but this rally comes as the peak season ended in March.
US LNG to Asia was sold out for more than a decade
The natural gas price in Asia has been far above US prices for years. The domestic US natural gas market’s transformation and expanding the addressable market far beyond the US pipeline network has made the energy commodity and NYMEX natural gas futures market more sensitive to international prices and supply and demand fundamentals.
Cheniere Energy (LNG) is a leading supplier of liquefied natural gas that travels worldwide on ocean vessels. In 2021, Cheniere’s CEO told CNBC that the company was sold out of LNG for more than a decade after signing long-term supply contracts with Asian consumers. Asian prices were multiples of US prices, making the business highly profitable. Cheniere’s share price has reflected the booming demand for LNG.
LNG shares rose from $27.06 in March 2020 to the most recent high of $149.42 in March 2022. At the $135.70 level on April 22, LNG shares reflect the growing demand for their energy product. While the shares and revenues exploded higher, earnings have been elusive.
The chart shows the negative earnings trend since Q1 2021. A survey of twenty analysts on Yahoo Finance has an average price target of $149.50 for LNG shares, with forecasts ranging from $61 to $180 per share.
LNG is a leader, but the EPS issue could cause the stock to become as volatile as the natural gas price over the past week.
A very volatile energy commodity
While price ranges tend to widen at higher levels, natural gas volatility was head-spinning over the past week.
As the daily chart of May NYMEX natural gas futures highlights, after trading to a high of $8.065 per MMBtu on April 18, the price moved below the $7 level on April 19. Natural gas has never been for the faint of heart as the price has ranged from $1.02 to $15.65 per MMBtu since trading on NYMEX began in 1990. However, after over a decade of lower highs and lower lows, the trend changed in June 2020.
The long-term chart illustrates the trend changed when natural gas futures moved above the 2018 $4.929 per MMBtu high, ushering in a bullish path of least resistance for the energy commodity. The quarterly price ranges since mid-2021 are the broadest since 2008, the last time the energy commodity eclipsed the $10 per MMBtu level.
Europe’s dependence on Russia causes supply issues
The previous administration warned Germany and the EU about depending on Russia for natural gas supplies. Meanwhile, US energy policy shifted from “drill-baby-drill” and “frack-baby-frack” in January 2021 when the Biden Administration began fulfilling its campaign pledge to address climate change.
Stricter regulations, canceling pipelines, and bans on fracking and drilling on federal lands caused oil and gas output to decline. While it handed the pricing power in the oil market back to the international oil cartel and Russia, it also limited Europe’s options for natural gas supplies. While the administration took a hard line against US production, it supported a Russian natural gas pipeline to supply Europe with the energy commodity.
The February 24, 2022, invasion of Ukraine changed the world. While the US, European, and other allied countries came together with severe sanctions, Europe’s dependence on Russian gas remains a window of opportunity for the Putin government. Retaliating for other sanctions, Russia is now demanding rubles for natural gas supplies, boosting the currency despite other stringent sanctions.
The US government has leaned on companies like Cheniere to divert supplies from Asia to Europe. However, the administration’s energy policy has not supported the new US terminals to liquefy natural gas and increase supply capacity. Russia remains in the driver’s seat in European natural gas requirements and is free to drive the price higher.
If prices in Europe are a guide, we could see a challenge to the 2008 and 2005 highs
At the recent $8+ high, US natural gas futures rose to the highest price since 2008. Meanwhile, European prices have screamed higher in 2022.
The long-term chart shows ICE UK natural gas futures rose to $800 in March. Before 2021, the all-time high was at the $117 level in 2005. At $171.39 at the end of last week, European natural gas prices remain at lofty levels above the pre-2021 record peak.
Natural gas has transformed into a far more international commodity. The US lost an opportunity to supply Europe and remove cash flow from Russia before the first Russian soldier crossed Ukraine’s border on February 24. The revenue from natural gas sales to Europe is funding the first major European war since WW II.
Rising natural gas prices will fuel inflation and hit consumers in their pocketbooks in the US. Natural gas is another victim of inflation, the war in Ukraine, and US energy policy. Addressing climate change is a noble cause, but fossil fuels continue to power the world. The shift from hydrocarbons to alternative and renewable fuels is a multi-decade, not a multi-month process. The economic and geopolitical landscapes and US energy policy shift ignited a very bullish fuse in a very combustible commodity. Natural gas price explosions and implosions could be the norm instead of the exception over the coming months and years.
--
Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
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