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Traditional energy commodities have been in the spotlight since Russia invaded Ukraine in February 2022. Russia is the leading and most influential OPEC non-member, and petroleum production policy is a function of decisions in Moscow and Riyadh. Meanwhile, Russia is the world's leading natural gas exporter, with Europe depending on the Russian pipeline for supplies.
European natural gas prices exploded to all-time highs in 2022 and remained at the highest pre-2021 prices in history. The U.S. natural gas futures rose to over $10 per MMBtu earlier this year, the highest level since 2008. The U.S. natural gas market is no longer limited to the North American pipeline network as LNG (liquefied natural gas) has increased its addressable market.
While oil and gas prices have come down from the highs, they remain at multi-year peaks, fueling inflationary pressures. While the consumer price index data followed by the Fed excludes volatile food and energy prices, energy is a critical cost for businesses and individuals.
We are moving into the heart of the winter when heating demand peaks. Historically, U.S. natural gas prices have rallied when the flow of the energy commodity into storage turns into withdrawals in November. Meanwhile, nearby natural gas futures prices have plunged from the August highs at just over $10 and were below $6.40 per MMBtu on November 18. Energy has been the best-performing stock market sector in 2022, which is likely to continue.
Energy has outperformed all the leading U.S. stock market indices.
- On November 18, the S&P 500 at 3,965.34 was 16.8% lower than the level on December 31, 2021.
- The S&P 500 Energy Sector SPDR (XLE) at $91.63 was 65.1% higher than the December 31, 2021, closing level.
- On November 18, nearby NYMEX crude oil prices at the $80.08 level were 14.7% higher since the end of 2021, and nearby NYMEX natural gas prices at $6.303 were 58.2% higher over the period.
Natural gas volatility is no longer a function of U.S. fundamentals
- LNG has made the U.S. natural gas market international, as exports expand the addressable market for U.S. supplies far beyond the North American pipeline network.
- Natural gas is an energy commodity in the crosshairs of the war in Ukraine, lifting European prices, creating supply concerns, and translating to higher U.S. prices.
- APA Corp. (APA), a US-based energy company, was at the $46.34 level on November 18, up 72.3% since the end of 2021.
Natural gas plunged, but the profits continue to keep the bid under U.S. producers.
- Nearby natural gas futures prices reached a high of $10.028 per MMBtu in August 2022, the highest price since 2008.
- December NYMEX natural gas futures at $6.303 per MMBtu is at the highest price in November since 2008.
- The average price in 2022 has been $6.833, with natural gas trading in a $6.39 range. The explosive price action has caused natural gas producer profits to soar.
U.S. energy policy received a boost in the midterm elections.
- The red wave in the U.S. midterm elections never materialized, supporting the Biden administration's energy policy.
- While Republicans are likely to control a marginal majority in the House of Representatives, the Democrats will continue to have a majority in the Senate.
- When asked what initiatives or policies would change after the midterm elections, President Biden answered, "nothing."
- U.S. energy policy will continue to be on a greener path, supporting alternative and renewable energy and inhibiting oil, gas and coal production and consumption.
Expect higher oil and gas prices for four compelling reasons.
- Reason No. 1: U.S. energy policy will continue its greener path, inhibiting oil, gas, and coal production.
- Reason No. 2: OPEC plus and Russia dominate global oil and gas supplies and pricing.
- Reason No. 3: U.S. SPR releases are nearing the 180-million-barrel level and will end in the coming weeks taking the additional supplies away from the market.
- Reason No. 4: China will emerge from its COVID-19 lockdowns, increasing worldwide demand for fossil fuels.
- Risk-reward favors the upside over the coming months in the current environment.