AFTER FALL: Natural gas prices have plunged on both sides of the Atlantic. Europe’ fall has got the headlines, but the heavyweight US natgas (NATGAS) plunge seen 18-month price lows. This helped relieve broader inflation pressures and recession fears (see chart). And it’s been an important driver of the equity markets’ strong start to the year. Lower prices have been driven by unseasonally warm weather and easing demand. The outlook is for a modest US price recovery. This would be a goldilocks scenario both for commodity and for macro investors. The US EIA is now forecasting average prices at $4.90/MMBtu this year, well below 2022 but above current.
DRIVERS: US demand upside comes from 1) some winter weather normalisation. 2) Freeport LNG, at 2% of US demand, coming back. 3) China’s re-opening supporting Asian LNG demand and balancing less European needs, with storage levels still high. Overall LNG demand should rise double digits and approach 15% of all US production. This will be balanced by 1) a 2% rise in US natgas production, helped by new Permian pipeline capacity. 2) Less usage for electricity generation (39% of total) as renewables gain more share, and we don’t repeat last summer’s extraordinary demand. 3) Overall demand to ease as economy downshifts from Q4’s 4% pace.
INSTRUMENTS: Natgas is the 2nd biggest asset in 24-constituent Bloomberg commodity index. Its 7.9% weight is behind only gold, given its combo of high trading liquidity and market size. Natgas exposed stocks, like Cheniere (LNG), EQT Corp (EQT), and Kinder Morgan (KMI), have outperformed the 60% physical price plunge. This is similar to oil peers. Analysts never saw $10 natgas as sustainable. P/E valuations often under 10x. And shareholder return policies strong.
All data, figures & charts are valid as of 18/01/2023