14 May 2009

Is energy back with a vengeance? (Part 2)

Natural Gas

The big difference with the oil market is its fragmentation and lower transparency; it is why I will only focus on he US market, the most transparent one. Do not dismiss the size of the gas market: it represents approximitely 60% of the oil market (50 mboe/d).

  • Whilst oil prices were hammered during the current crisis (-63% from nadir to trough), natural gas was even worse at -77%
  • At 2.5% per year (1990-2008), the annual growth consumption is twice that of oil. According to IEA and Investec, this growth is expected to continue at the same pace.
  • It is cleaner than oil and coal, and therefore seen as an alternative for the future.
  • From the table, Investec expects the market to be oversupplied in 2009 due to the current economic downturn.
  • This should change in 2010 and 2011 when the full impact of reduced gas production will be felt in 2010 (50% contraction in the number of rigs in 2009) couple to a 50% decrease in CAPEX, according to Investec.
  • Gas is cheap relative to oil ($22 /b equivalent) with the ration of WIT/gas standing at 14, the highest for 15 years
  • Natural gas storage is close to its seasonal low
  • Technically, it seems that the low was reached late April, and the upward dynamics on the monthly chart is encouraging and has not been reversed so far.
  • Finally, do not forget the importance of weather, and in particular the hurricane season which starts during the summer.

Whilst, like oil, I do not expect a strong price uptick short term, I believe it will however starts earlier and will be stronger than oil. The aggressive investor can position itself on the gas market in the coming weeks. Like for oil, I would however welcome some consolidation.

I am convinced that any improvement in the economy will translate into very large price increases for the energy markets, well beyond the consensus.

Energy will be back with a vengeance.