4

SEP
2018

Are you investing in Natural Gas – prices could be on the rise?





Natural gas is increasingly popular. It is considered to be more mature than most renewable energy sources and is more environmentally friendly than the likes of coal or petrol...


The price of natural gas spiked to 3.63 at the beginning of this year in January when very cold winters were forecast. This summer the consumption of natural gas has also increased with July nearly beating the record previously set in August 2016.


Natural Gas on Nymex is now steady and trading at 2.96 $/MMBtu. Trading Economics anticipates that natural gas will trade at 2.63 $/MMBtu by the end of this quarter and at 1.99$/MMBtu next year.


However, gas prices look like they are on the rise

Data from the World Bank shows that natural gas prices for the first three months of 2018 were up 25% in Europe from 5.70 to 7.15 and 3.01% to 3.08 in the US over the same time period last year.


And Societe Generale researchers are bullish in the near term forecasting for 3Q18 at $3.03/MMBtu, vs the forward market’s $2.91/MMBtu and a firm conviction on their 2018 bullish bias given the current low storage position, expected demand strength this summer, and weather risk. Societe Generale expect 2018 total US demand to rise approximately 6%.

 

Source: Bloomberg as of 31/08/18. The figures relating to past performances relate to past periods and are not a reliable indicator of future results.

 

And according to the US EIA natural gas consumption in July was just shy of the monthly record seen in August 2016.  July and August typically see high consumption because of increased cooling demand.


“PointLogic Energy estimates that July power burn averaged 36.9 billion cubic feet per day (Bcf/d). Data from the U.S. Energy Information Administration’s Natural Gas Monthly indicate the highest average level of power burn in any month (through May 2018) was 37.2 Bcf/d in August 2016.”


The EIA also finds that the long-term trend in the power sector is increasing the generation of electricity from natural gas. The combination of relatively low natural gas prices, environmental regulations, and supportive renewable energy policies has led the industry to build new natural gas-fired and renewable capacity and to retire coal-fired power plants.


In recent years there has also been a shale hydraulic fracturing breakthrough, which has allowed large reserves of gas to be released from stores (shale deposits) deep underground. This has helped increase supply.  Production growth was robust at end-2017, but winter weather caused temporary well freeze-offs in several basins in 1Q18, negatively impacting the trend, and while growth resumed in 2Q18, the pace has been more contained.


Last year China switched from coal to gas

This prompted the largest source of energy growth to come from natural gas last year. According to BP’s Statistical Review of World Energy 2017 was a strong year for natural gas with consumption up 3% and production up 4% – the fastest growth rates since immediately following the global financial crisis. The single biggest factor fuelling global gas consumption was the surge in Chinese gas demand, where consumption increased by over 15%, driven by government environmental policies encouraging coal-to-gas switching.

Seeking Alpha also reports that consumption rose by 7.9% y-o-y in May, but has since continued at a more measured pace.

 
Gas imports are also on the rise, which could support the price of natural gas

According to a note from Barclays natural gas imports continue. Imports of natural gas totalled 7.8 bcm in July, up 28% compared to July 2017. Volumes also increased 1% sequentially. Higher Asian LNG prices near $10/MMBtu pose a risk to imports at the margin, but we expect double-digit growth to continue over the near term in advance of a tight Asian market expected this winter. China’s announcement last week of a potential 25% tariff on LNG imported from the US, if enacted, would likely increase prices in the short term as the market rebalances. Longer term, tariffs would pose a threat to new LNG facilities, which are increasingly looking to China for offtaker contracts.


Seeking Alpha adds that exports rose by 7.4% y-o-y mostly due to robust pipeline inflows into Mexico and strong LNG sales, which jumped by 56%...Strong exports growth and an increase in national consumption ensured that the growth in total demand stayed positive. In fact, on an annualized basis, aggregate demand has not posted a single negative growth figure since January 2010.


Statista reports that natural gas prices are likely to rise over the next decade. This year US prices are at 3.22$/MMBtu and European at 5.66$/MMBtu, while next year they are forecast to rise to 3.25$/MMBtu and 5.83$/MMBtu, respectively, and by 2030 they will be at 5$/MMBtu in the US and 8$/MMBtu in Europe.


If you are looking for a leveraged investment in Natural Gas, Societe Generale offer a range of leveraged exchange traded products, giving both long or short exposure with 2x, 3x or 5x leverage.

 

Remember, as with most investments, the value can go down as well as up, and as a leveraged investment these products are designed for sophisticated investors, so if in doubt, seek advice.

Post by: Zak de Mariveles, Head of UK Exchange Traded Products


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