Natural gas prices are on the rise. Here are the stocks to take advantage of on the rise.
Natural gas has always been oil’s poor cousin, a commodity that many ignore until they have to pay their heating bill.
Now, natural gas is the main player in the drama that is gradually dragging the global economy. Rising commodity prices — along with other fuels, such as coal and propane — are forcing countries to cut factory production, and could send heating and electricity prices sky high this winter.
Analysts have already cut global growth forecasts based on the energy crisis. Goldman Sachs recently forecast that China won’t grow at all in the third quarter versus the previous quarter, in part due to its energy problems. In the UK, energy companies serving nearly two million people have gone out of business.
In the US, natural gas futures are up more than $6 per million British thermal units (BTU) for the week, nearly four times from their pandemic lows. Demand for oil increases with gas, as some utilities are likely to switch their input fuels to oil as gas remains expensive.
The problem is more acute in places that have to import more fuel. Europe and Asia are bidding for the cost of LNG to secure enough for the winter. European gas prices are nearly four times their five-year average, and recently traded at a record $32 per million British thermal units, according to S&P Global Platts Analytics. The Asian benchmark price reached an all-time high of $34 on Thursday.
There is no simple answer to why multiple energy sources are so expensive and scarce today. A cold snap late last winter in Europe led to lower gas levels in storage. US producers, which account for the largest share of the world’s gas production, have stopped drilling new wells as they align their balance sheets after years of overspending. The Chinese economy was recovering, causing demand to rise at a time when supplies were diminishing. The prices of other commodities such as coal have also risen, making it difficult for energy producers such as utilities to switch their input fuels. Oil and gas have also suffered from the same problems that all global markets face – too few workers to transport fuel.
The role of climate change in the energy crisis is also difficult. Carbon emissions lead to more extreme weather that damages energy infrastructure. One reason oil and gas supplies are now low is that Hurricane Ida has destroyed infrastructure in the Gulf of Mexico, cutting large supplies off the line.
But the fight against climate change also presents challenges. The transition to cleaner fuels has not always gone smoothly. One reason for European energy prices to increase is that wind has simply not been blowing enough in recent weeks to power the turbines that are an increasing part of the continent’s energy supply.
“There will be two sides to this debate,” says Daniel Yergin, an expert on energy markets and vice president of IHS Markit. “One says let’s go faster, and the other says you’re going too fast. Don’t restrict investment when you don’t really have enough alternatives to replace what you’re restricting.”
For investors, the crisis of power opens up new opportunities. It may take months before the market returns to equilibrium. A cold winter could lead to higher prices that would not only dampen economic growth, but potentially cause political unrest.
The obvious beneficiaries seem to be the natural gas producers. But it’s not quite that simple, in part because most producers have already hedge their production in 2021 and most of their production in 2022 at low prices. “None of the hedges even next year are a lot less than $3,” says Neil Dingman, an analyst at Trust Securities.
He believes that investors can still be exposed to natural gas, and benefit from higher oil prices as well, by buying shares of oil companies that happen to be major gas producers.
Semarx Energy (Stock ticker: XEC), which received shareholder approval this week to merge with
Cabot Oil and Gas (COG). Cabot is not protected in 2022 production as of its last earnings report. Similarly, dry natural gas and natural gas liquids account for nearly half of production in
marathon oil (MRO), which has also reported relatively few hedges for this year and next, says Dingman.
The major oil companies also tend not to hedge production. He could be among the biggest beneficiaries
Royal Dutch Shell (RDS.B), the main producer of propane, whose prices have also gone up, Dingman notes. “In the third quarter, I think people are going to be very surprised” by how much these companies make from gas, he says.
Another way to play out these dynamics is to invest in companies that are the main gears in the global supply system, such as
Cheniere Energy (LNG), whose Gulf Coast terminals allow US gas to be processed and shipped abroad. beanie
the developing (TELL) presents exposure to the same topic, although it is more speculative.
“It’s excellent for LNG companies,” says Rebecca Papin, chief energy trader at CIBC Private Wealth Management. “There was a concern that there was over-investment in LNG as recently as two years ago.” not longer.
Some petrochemical companies could also benefit. Chemical plants need natural gas to run. Those with operations in the United States are in better shape because they pay relatively less, notes Rich Redach, head of global gas planning at S&P Global Platts. can benefit
daw (dao) and
Lyondel Basil Industries (LYB). NS
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