NATURAL GAS (NATGAS)

What is happening with NATGAS?

Despite the bearish macro environment (especially currently seen across global stocks), the natural gas market remains bullish and very much in the uptrend. The main reason for it is years of underinvestment in supply and production (exacerbated during Covid times), together with minor (on macro scale) factors – sustained high inflation, global supply and demand issues due to war in the Ukraine.

As a result, US Lower 48 natural gas production remains flat for 2022, while demand keeps rising, currently sitting at 6.5 – 7.5 bcf/day increase YoY. Coupled with higher-than-normal temperature spikes across the US, it’s only a matter of time, until the natgas prices start seeing a move upwards again (already started, but we’re talking towards and potentially double digits by winter).

What does it mean for the market in general? Well, natgas prices will continue to rise throughout the year (with price spikes in both directions in response to short-term triggers, like weather), unless the above supply/demand dynamic changes. Natgas-indexed ETF, UNG, will generally follow suit. And the gas-dependent stocks are generally considered a good buy, if the trend continues. What’s more, the US natgas market is currently in backwardation (spot price is higher than the future price), which means you will actually get paid for holding perpetual derivatives, though this is short-term and can change quickly.

What is the most market participants watching at the moment? Recovery in the Freeport LNG facility to export much needed natgas to Europe. Last month, the explosion brought the facility to a halt, eradicating 2 bcf/day demand and bringing the price down by 17% in a single day. The facility is expected to restart later in the year, around Nov-Dec, so when this happens, the price is likely to respond very favourably. As always, when that happens, the recovery will usually be already priced in.