The main differential is between north america natural gas and international spot LNG cargos, NA natugas is constrained by infrastructure and my gut feeling is that the massive recent ramp up in production was in anticipation of export markets in the EU, who cut off all piped gas from Russia. Capex decisions will probably stay for another year or so, because there's completions in LNG facilities in 2024/2025 I think? So currently the NA market for natgas is constrained than crude oil. To really see if it's rolled over we would have to see what happens when all the LNG facilities in the US south have been completed and see where the price settles. If LNG realizations for NA gas producers hit >8$/mmbtu then they can make a ton of money long term. Normally a company like RRC who sells into spot would tank as natural gas prices collapsed, but the equity is holding up. My 2c is that the equity is still holding on in the expectations of the LNG terminals being finished construction like above.
Overproduction, a warm winter, and the freeport LNG shutdown really crushed natural gas prices. the latter 2 couldn't really be predicted.
In regards to DUCs wouldn't the exhaustion for DUCs be bullish as to increase supply E&Ps need to ramp up Capex pushing up oil break evens to >70$/bbl wti? If they E&Ps have to meaningfully increase Capex then that sets a floor for crude oil until they do decide to ramp massive Capex programs. Natural gas on the other hand could still perform badly due to shale E&Ps dumping it into the market.
Hi Russell, thanks for the update. I'm not an expert in the energy futures market, what are the main players in long dated futures? Do producers hedge that far ahead or is it mainly speculators?
I get your point overall, something to watch. I tend to think this is likely a correction after an upside move that was a bit overdone (especially at the front end). Also I've read recently that European industrials were hesitant about signing long-term contracts because of the lack of visibility on how natural gas will be treated within the EU green policy framework... maybe if that gets resolved that would support long-term prices? Given price differentials, it seems to make a lot of sense to keep building LNG export facilities to sell to Europe and Asia. In which case increased US production wouldn't necessarily destroy prices (up to a point). But that's a high level view, I'm not an industry expert.
Valid point about who is playing long term futures - but like I said they called the bear market superbly. Looking into the data more - the applachian fields have curtailed production growth, so the idea that the PErmian overproduced on a view it would be exported to Europe makes sense...
Model portfolio is ongoing... I have learnt when the market is trading the way you think is should - bet big. When its not, bet small. Currently I am in the bet small bucket - 10% of NAV, so I am not sure it would be right to publish a model portfolio when I am not betting big... thoughts?
Oil is tricky too - Russia seems to have shipped far more oil than I would have assumed, but then the US has sold down a lot of it strategic petroleum reserve. Needs a post of its own
The main differential is between north america natural gas and international spot LNG cargos, NA natugas is constrained by infrastructure and my gut feeling is that the massive recent ramp up in production was in anticipation of export markets in the EU, who cut off all piped gas from Russia. Capex decisions will probably stay for another year or so, because there's completions in LNG facilities in 2024/2025 I think? So currently the NA market for natgas is constrained than crude oil. To really see if it's rolled over we would have to see what happens when all the LNG facilities in the US south have been completed and see where the price settles. If LNG realizations for NA gas producers hit >8$/mmbtu then they can make a ton of money long term. Normally a company like RRC who sells into spot would tank as natural gas prices collapsed, but the equity is holding up. My 2c is that the equity is still holding on in the expectations of the LNG terminals being finished construction like above.
Overproduction, a warm winter, and the freeport LNG shutdown really crushed natural gas prices. the latter 2 couldn't really be predicted.
https://www.naturalgasintel.com/mexico-eca-lng-development-advancing-to-2024-start-date/
would tend to agree - but I just want to flag where I could be wrong... as I am not marketing a fund, I dont have to pretend I am always right!!
In regards to DUCs wouldn't the exhaustion for DUCs be bullish as to increase supply E&Ps need to ramp up Capex pushing up oil break evens to >70$/bbl wti? If they E&Ps have to meaningfully increase Capex then that sets a floor for crude oil until they do decide to ramp massive Capex programs. Natural gas on the other hand could still perform badly due to shale E&Ps dumping it into the market.
Hi Russell, thanks for the update. I'm not an expert in the energy futures market, what are the main players in long dated futures? Do producers hedge that far ahead or is it mainly speculators?
I get your point overall, something to watch. I tend to think this is likely a correction after an upside move that was a bit overdone (especially at the front end). Also I've read recently that European industrials were hesitant about signing long-term contracts because of the lack of visibility on how natural gas will be treated within the EU green policy framework... maybe if that gets resolved that would support long-term prices? Given price differentials, it seems to make a lot of sense to keep building LNG export facilities to sell to Europe and Asia. In which case increased US production wouldn't necessarily destroy prices (up to a point). But that's a high level view, I'm not an industry expert.
Valid point about who is playing long term futures - but like I said they called the bear market superbly. Looking into the data more - the applachian fields have curtailed production growth, so the idea that the PErmian overproduced on a view it would be exported to Europe makes sense...
Shale drillers are doing for US foreign policy what the US military tried and failed.
Looking forward to your model portfolio post Russell!
Model portfolio is ongoing... I have learnt when the market is trading the way you think is should - bet big. When its not, bet small. Currently I am in the bet small bucket - 10% of NAV, so I am not sure it would be right to publish a model portfolio when I am not betting big... thoughts?
That's no problem at all. I'd love to see how you translate your thoughts into portfolio construction.
Of course, you can only bet big when there's high conviction!
what about oil?
Oil is tricky too - Russia seems to have shipped far more oil than I would have assumed, but then the US has sold down a lot of it strategic petroleum reserve. Needs a post of its own