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Royal Dutch Shell operates a plant in Qatar, known as Pearl GTL, which transforms natural gas into liquid fuels.
Stuart W. Conway / Shell International Limited
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Natural gas has long been the poor cousin of oil, a commodity many ignore until they have to pay their heating bills.
From now on, natural gas is the main actor in a drama that is gradually pulling the world economy down. A surge in the price of raw materials, along with other fuel sources, such as coal and propane, is forcing countries to cut industrial production and could push up heating and electricity prices this winter.
Analysts have already lowered global growth forecasts due to the energy crisis. Goldman Sachs recently predicted that China would not experience growth in the third quarter compared to the previous quarter, in part because of its energy issues. In the UK, power companies serving nearly two million people have gone bankrupt.
In the United States, natural gas futures topped $ 6 per million British thermal units (BTUs) during the week, nearly quadrupling from their pandemic lows. The demand for oil increases with gas, as some utilities are likely to switch their fuel to oil, as gas remains expensive.
The problem is even more acute in places that need to import more of their fuel. Europe and Asia are pushing up the price of liquefied natural gas, or LNG, to secure enough for the winter. Gas prices in Europe have roughly quadrupled from their five-year average and were recently trading at a record $ 32 per million BTUs, according to S&P Global Platts Analytics. The Asian benchmark price hit an all-time high of $ 34 on Thursday.
There is no simple answer as to why multiple energy sources are expensive and scarce today. A cold snap at the end of last winter in Europe resulted in low levels of gas in storage. U.S. producers, who account for the largest share of the world’s gas production, have refrained from drilling new wells as they strive to align their balance sheets after years of overspending. The Chinese economy had rebounded, causing demand to surge sharply as supplies dwindle. And the prices of other commodities such as coal have also risen, making it difficult for power producers like utilities to switch their input fuels. Oil and gas also faced the same issues that face all of the world’s markets – too few workers to move the fuel.
The role of climate change in the power crisis is also delicate. Carbon emissions lead to more severe weather conditions which damage energy infrastructure. One of the reasons that oil and gas supplies are low right now is because Hurricane Ida damaged infrastructure in the Gulf of Mexico, taking substantial supplies offline.
But the fight against climate change also poses challenges. The transition to cleaner fuels has not always gone smoothly. One of the reasons that electricity prices in Europe have increased is that the wind has simply not blown enough in recent weeks to power the turbines which constitute a growing part of the continent’s power supply.
“There will be two sides to this debate,” said Daniel Yergin, energy markets expert and vice president of IHS Markit. “One says to go faster and the other says you are going too fast. Don’t limit the investment when you don’t really have sufficient alternatives to replace what you are limiting.
For investors, the power crisis opens up new opportunities. It could be months before the market returns to equilibrium. A cold winter could lead to even higher prices which would not only undermine economic growth, but possibly cause political upheaval.
The obvious beneficiaries seem to be the producers of natural gas. But it’s not that simple, in part because most growers have already hedged their 2021 production and most of their 2022 production at lower prices. “All the hedges, even for next year, are well below $ 3,” says Neal Dingmann, analyst at Truist Securities.
He believes investors can still gain exposure to natural gas and also benefit from rising oil prices by buying shares of oil companies that are also major producers of gas.
Among these are
Cimarex Energy
(ticker: XEC), which this week gained shareholder approval to merge with
Cabot Oil and Gas
(TOOTH). Cabot is not covered on 2022 production as of the date of its last earnings report. Likewise, dry natural gas and natural gas liquids account for almost half of the production at
Marathon Oil
(MRO), which also reported relatively few covers for this year and next, says Dingmann.
Big oil companies tend not to hedge their production either. Among the biggest beneficiaries could be
Royal Dutch Shell
(RDS.B), a major propane producer, whose prices have also skyrocketed, Dingmann notes. “In the third quarter, I think people are going to be very surprised” at what these companies are getting from the gas, he said.
Another way to play on this dynamic is to invest in companies that are key cogs in the global supply system, such as
Chénière Energy
(LNG), whose terminals on the Gulf Coast process and ship US gas overseas. Small cap
Earthling
(TELL) offers exposure to the same theme, although it is more speculative.
“This is great for LNG companies,” said Rebecca Babin, senior energy negotiator at CIBC Private Wealth Management. “There was concern that there was overinvestment in LNG just two years ago.” Not anymore.
Some petrochemical companies could also benefit. Chemical plants need natural gas to operate. Those with operations in the United States are in better shape because they pay relatively less, notes Rich Redash, head of global gas planning at S&P Global Platts. This could benefit
Dow
(DOW) and
LyondellBasell Industries
(LYB). b
Write to Avi Salzman at [email protected]
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