📫 Open for Dave's Prediction on Nat Gas

 
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Has COVID-19 Been Good or Bad for Natural Gas?

David Fessler | Energy and Infrastructure Strategist | The Oxford Club

Dave Fessler

Prior to 2020, there was a strong global demand for liquefied natural gas (LNG).

2019 saw a 13% year-over-year increase in global LNG trade. Total sales hit 354.7 million metric tons.

It was the sixth year in a row of LNG growth. Last year alone, the U.S. increased production by 13.1 million tons.

But black swan events can happen at any time... and they sure are disruptive.

Here's what's been transpiring in the natural gas space since the COVID-19 pandemic came on the scene...

Massive Demand Disruption

This past winter was mild and kept what would normally have been strong seasonal demand in check. Then the coronavirus happened.

It was a classic black swan event. Global economic activity shut down.

U.S. LNG exports plunged, spelling disaster for U.S. natural gas prices...

Henry Hub Natural Gas Spot Price
 

Natural gas consumption in the U.S. is expected to drop 3.9% year over year to 81.9 billion cubic feet per day in 2020, according to the Energy Information Administration.

One of the big culprits has been decreased industrial sector use. It's down 7.1% so far this year. This can be directly linked to lower manufacturing activity from stay-at-home orders.

Low natural gas prices are keeping natural gas-only producers from drilling new wells. This is especially evident in the Marcellus and Utica shale formations.

 

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If predictions hold true, 2020 will be the first year in more than a decade with declining demand for natural gas. Producers used to see natural gas demand growth rates of more than 3% annually.

Another factor weighing on U.S. natural gas prices is an increase in stored natural gas. At the end of April, storage stood at 2.3 trillion cubic feet. That's 20% higher than the five-year average. And that storage is projected to reach 4.2 trillion cubic feet by the end of October. That would be a record.

On the plus side, the ridiculously low natural gas prices are a welcome sight for power producers. Coal demand is decreasing as power plant operators around the world switch over to natural gas.

Additionally, we saw 2.5 million jobs added in May. That's a strong sign that we may have hit the bottom and that economic growth is back. That will certainly boost industrial and commercial demand for natural gas.

Short-Term and Long-Term Predictions

I've previously written about the bridging role of natural gas. In the power sector, its low cost and lower pollution levels make it preferable to coal.

So I'm often asked by investors about my predictions on natural gas, especially recently in light of the coronavirus pandemic.

Very short term, I see natural gas demand slowly increasing as U.S. states and global economies reopen. That should last about six months.

Demand should continue to grow at pre-coronavirus rates (about 3% on an annualized basis) as global economies expand. This should last about five years or so.

Long term, I see natural gas entering a period of slow decline, as Renewable energy sources continue to become cheaper and more widespread.

One way to play natural gas is to focus on natural gas-heavy exploration and production companies - especially those focused on the Appalachian formations.

Another tactic is to look at U.S. LNG producers as they ride the growth wave.

That's how I see it. And I'll continue to update you on any developments in this sector.

What do you think? I'd love to hear your opinion. Leave me a comment by clicking here.

Good investing,

Dave

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