(wow) Words Of Wonders Level 539 Answers – Some subscribers came in last week to talk about how the current price spike we’re seeing in natural gas could be a precursor to the oil market. Of course, they are not wrong to think so. For those of you who don’t know, natural gas prices actually started to rise in 2000, during the oil bull market of 2003-2008.
Basically, the logic for the natural gas and oil markets is the same: supply and demand. But there are fundamental differences in the supply and demand drivers of natural gas compared to oil.
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While all differences are said, at the end of the day, both are things, and commodities have a tendency to go through boom and bust cycles.
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For natural gas, the bear market has lasted longer than oil for one very important reason: The US shale gas revolution began in 2003. By 2016 it will become the main game.
Since the delivery time of shale gas is long, it resulted in a massively oversupplied market by 2008. Additionally, Appalachia (Marcelo/Utica) has become the largest shale gas region in the United States since the 2008/2009 collapse. The bear cycle is even worse.
To make matters worse for US shale gas, the US shale oil revolution associated with increased gas production (a byproduct of shale oil production), pushed the market into even more surplus. The end result is massive consolidation among US shale gas producers and the beginning of a disciplined approach to investment.
Even with Henry Hub prices close to $5/MMBtu, the number of gas rigs in the US is not increasing because producers are now considering “production at any cost” after several bear market years.
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In addition to now limited inventories, years of low natural gas prices have resulted in a large increase in U.S. natural gas exports via LNG and pipelines to Mexico.
. By 2025, US LNG exports are expected to average ~15 bcf/d and Mexican gas exports are expected to average ~9 bcf/d. Looking at this demand figure, total gas demand this year averaged ~97.4 Bcf per day. We will export 25% of the requirements. This demand will be structural in nature, meaning that it will not be subject to climate incentives.
So, in short, the natural gas market in the United States is a perfect commodity because there is no cartel that can control the supply and it completely drives the market. After years of low prices, producers are consolidating and are now limiting production when demand (exports) is very high.
A similar development is taking place in the oil market. In fact, we have written about this many times before, to remove this old article.
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On June 5, 2017, “Understanding the story: Why did Saudi Arabia cut oil production in 2014?” We wrote an article titled If you take the time to read the article, you will see that the decision of the Saudis to go into a price war in 2014 was not just due to non-OPEC production growth, but the production growth was coming from within OPEC. . Fearing a loss of market share within OPEC, the Saudis could no longer play the role of swing producer and decided to open up the oil market.
In the wake of the Saudi price war, future oil projects were canceled as a result of investment cuts globally. Approved during the golden days of $100 oil (2010-2014) are still online in 2015-2019. But that number is shrinking, as Goldman explains below:
As long-term oil supply is forecast, demand continues to grow along with the global economy. China’s oil demand in the second half of 2021 is now expected to be 13% higher than in 2019. Given, this is roughly ~1.9 mb/d of demand growth, or slightly less than ~2% of global oil. need
That demand growth essentially offsets nearly 3 years of previous US non-OPEC plans. It also does not take into account the natural supply that is lost every year due to oil shortages.
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But the problem with today’s oil market is that COVID is still limiting the full potential of global oil demand, and as a result, OPEC+ still has capacity. Unlike the natural gas market, where there is no cartel to limit supply, oil market participants see excess capacity as a limiting factor for any price increase.
However, if you fast forward to 2022, the overcapacity argument weakens as OPEC+ increases oil production. Currently, OPEC+ expects global oil demand to end before the pandemic peaks, but we believe they are still cautious. A large delta is assumed in everyone’s demand estimates today by the OECD.
As we discussed in this article, we think that the 2022 oil demand estimate will increase above the OECD demand, hence the higher deficit.
Now, if we use 2003-2008 as an approximation, the natural gas market first went into deficit (2000-2001) before the oil market went into deficit continuously from 2003 (thanks to China’s growth). .
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This time, US shale gas production cuts and increased exports will end a multi-year natural gas bull cycle, while oil market growth will be supply-driven (not enough production on the line).
Natural gas is a sign of what will happen to oil once OPEC+ runs out of excess capacity. As long as oil demand continues to rise, production cuts will affect the world in the same way that rising natural gas prices affect Europeans.
For energy investors, the 2014-2020 bear market was incredibly brutal. But as the old saying goes, “low prices cure low prices.” A deeper understanding of US shale and other oil market fundamentals leads us to believe that we are finally entering a multi-year bull market. Investors should take advantage of the upcoming trend and take positions in real assets such as precious metals and energy stocks. If you want, we can help you! See for yourself!
HFI Research specializes in analyzing heterogeneous investments. We help you find clarity in a world of uncertainty. We take contrarian thinking very seriously and believe that owning a contrarian investment thesis is the only way to truly profit from the market. We share our investment analysis with premium subscribers through daily and weekly reports.
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Disclosure: We do not hold equity, options or similar derivative positions in any of the companies mentioned and do not expect to initiate such positions in the next 72 hours. I wrote this article myself and it is my opinion. I receive no compensation for this (other than seeking alpha). I have no dealings with any of the companies whose stock is mentioned in this article.
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