Is Natural Gas Potentially in the Early Stages of a Secular Bull Market?
Energy News Update: July 29th, 2024 Is Natural Gas Potentially in the Early Stages of a Secular Bull Market? Natural
Energy News Update: July 29th, 2024 Is Natural Gas Potentially in the Early Stages of a Secular Bull Market? Natural
Energy News Update: July 29th, 2024
In our July 22nd Energy Update, we explained why we believe the latest short-term decline in Natural Gas was a long-term buying opportunity based on the empirical observation that since 2000 when Natural Gas declined to where it was in 2024, it always preceded Cyclical Bull Markets:
As was shown in the above chart, since 2000, Natural Gas Cyclical Bull Markets trended higher for at least 2 to 3 years.
In today’s report, we will explain why we may not only be in the early stages of a Cyclical Bull Market but also a Secular Bull Market.
The chart below shows Secular & Cyclical markets over the last 25 years:
When planning your long-term energy strategies, it is important to know the differences between Cyclical and Secular markets. Cyclical energy markets last a few years, while Secular energy markets are longer lasting many years, and often include multiple Cyclical markets.
In today’s report, we will also explain what led to the 2 previous Secular Markets, one a Bull, and one a Bear, and why we may be in the early stages of a 2nd Secular Bull Market.
The 1st Secular Natural Gas market was a Bull Market from 1999 to 2009, which included 4 Cyclical Bull Markets. During those 10 years, Natural Gas couldn’t respond quickly to increased demand caused by hot summers or cold winters, or during the summer storm season, when hurricanes often disrupt production resulting in lower supplies.
This was the major influence leading to a Secular Bull Market characterized by high volatility.
This period was followed by the 2nd Secular Natural Gas market, a Bear Market from 2010 to 2020, which included 3 Cyclical Bear Markets. Fracking was introduced during this period enabling the production of Natural Gas to be more efficient, which resulted in America being blessed with sufficient supplies to meet our energy needs over the next 10 years.
This led to a Secular Bear Market characterized by lower volatility.
But this all changed in 2021 when a “War on Fossil Fuels” was instituted in America while embracing “Green Energy” policies. The consequence of these 2 policies is the production of Natural Gas is now being restrained, which may lead to a 2nd secular Bull Market characterized by high volatility.
In our July 22nd Energy Update, we said our approach for analyzing the Natural Gas market is to use the empirical evidence derived from past price patterns to guide our recommendations and then explain why the patterns formed.
In the next chart, note two very similar patterns that were formed in 2002 & 2024 are circled in red.
As you can see in the next 2 charts, both patterns were formed after explosive Cyclical Bull Markets, which followed relatively calm periods
2002
2024
In both instances, after calm periods both markets experienced explosive rallies from below $2.00 to $10.00 per MMBtu. And both markets then retraced all of their gains trading back below $2.00 per MMBtu.
Why did Natural Gas experience wild price swings in
2002 and 2024?
As I explained earlier, the Natural Gas market entered a Secular Bull Market from 1999 to 2009, which was characterized by high volatility. Wild swings from spike highs to unsustainable lows are classic price patterns during energy Secular Bull Markets. The pullbacks are useful tools for large traders to lock in profits accrued during the spike highs while helping them to again enter new positions at very attractive price levels for the next move to higher levels.
Are there any other similarities between the explosive rally in 2002 and a potential explosive rally in 2024?
Yes! Just before the rally in 2002, Baker Hughes reported year over year active Gas rigs were down 19%, and in their last report on July 26th, Baker Hughes reported active rigs this year are down 21% year over year. In both instances, producers responded to the unsustainably low prices below the cost of production by cutting production to support higher prices long-term.
Therefore, we believe the risk of Natural Gas experiencing an explosive rally similar to 2002 this year is very high, and recommend anyone with agreements expiring over the next 18 months take advantage of the recent decline to lock in rates lower than where they are expected to be at least through 2025.
At the beginning of this report, we promised to explain why we may be in the early stage of a Cyclical Bull Market but also an early stage of a Secular Bull Market
We believe the risk of a 2nd Secular Bull Market is increasing due to the war on fossil fuels and green energy policies discussed earlier are gaining traction worldwide. The ramifications of these policies are higher energy prices and price volatility here and abroad.
The silver lining for America’s fossil fuel industry is we have become the largest exporter of Liquified Natural Gas (LNG) overseas and exports to Mexico via pipeline growth, which benefits their profit margins.
The Energy Information Administration (EIA) forecasted America’s liquefied Natural Gas (LNG) exports will continue their growth since 2016 with three LNG export projects presently under construction beginning operations and ramping up to full production by the end of 2025.
The EIA also forecasted another factor that will support the growth of America’s Natural Gas exports, our continued pipeline growth, mainly to Mexico:
The byproduct of the continued growth in America’s exports is the EIA predicts America’s net exports of Natural Gas (exports minus imports) will grow 6% to 13.6 Bcf/d in 2024 compared to 12.8 Bcf/d in 2023, and in 2025, the EIA predicts net exports will increase an additional 20% going to 16.4 Bcf/d.
The continued growth in America’s exports benefits the bottom line of our energy companies, but it will adversely impact America’s consumers as the growth in exports is decreasing our domestic supplies, which will support higher domestic prices long-term.
It is important to note Green Energy policies embraced throughout the world are showing no signs of abating; therefore, America plans on continuing to build more facilities to increase our capability to meet the long-term energy needs overseas and in Mexico.
Natural Gas is still by far the largest source of power for the generation of Electricity in America and will remain so for at least the next 5 to 10 years. The world’s dependence on America exporting Natural Gas will draw away supplies for our domestic use and keep prices higher here at home.
These facts will not be impacted by which party controls the White House in 2025. Either way, the present price of Natural Gas is below the cost of production and producers will be forced to cut production, and our exports of Natural Gas will continue to increase for the foreseeable future.
Based on these facts the risk of our entering a 2nd Cyclical Bull Market within an ongoing Secular Bull Market is increasing. Therefore, we recommend securing long-term agreements when your present agreements expire. Those who did so in 2002 avoided the pain of higher prices and extreme volatility over the next seven years.
Not every client’s risk tolerance and hedging strategy are the same, but hopefully, today’s report will help put into perspective your risk/reward opportunities. We invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.
Ray Franklin
Energy Professionals
Senior Commodity Analy
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