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Update: Oil And Natural Gas Opportunities

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Includes: BNO, BOIL, DBO, DGAZ, DTO, GAZ, GAZB, KOLD, NRGD, NRGO, NRGU, NRGZ, OILK, OILX, OLEM, SCO, UCO, UGAZ, UNG, UNL, USAI, USL, USO, USOI, YGRN
by: Mad Genius Economics
Mad Genius Economics
Investment advisor, macro, gold & precious metals, long-term horizon
Summary

Oil and natural gas opportunities haven't changed.

Gas building strong indicators.

Midstream companies and gold best places for profit.

Shortly after the price of crude oil crashed into negative territory, I posted an article about where I think the energy sector might go and what the opportunities were. My assessment was that the opportunities would be in natural gas and midstream transportation and storage, and also lower energy prices would supremely benefit precious metals mining companies with a rising price of the metals and a lower price for energy. As for gas, I said it looked like gas would probably hit $2.20, then $2.40, and possibly as high as $2.60. Almost as soon as I made that call, gas was up close to $2.20 in a matter of a couple of days.

On the one hand, it was nice to be right. On the other hand, gas has dropped over 25% since then. Yikes!

So the obvious question, if you agreed with my assessment, is what will happen with gas next? Especially in light of Jay Powell's recent comments regarding the headwinds the economy now faces, as well as this article about LNG demand.

The outlook for gas (summer air conditioning and winter heating) hasn't changed just because the price of NG fell precipitously in the last two weeks. This summer is projected to be warmer than usual. That translates into more air conditioning, which means power plants will have a greater load to burden. According to the EIA, natural gas power still represents nearly 40% of our power generation. That is about double either of the next closest sources of energy, which are coal and nuclear.

If you look at the chart for gas, you can see that the triple bottom I mentioned two weeks ago is now forming a quadruple bottom. Each of those four bottoms is sequentially slightly higher than the last, which is still a bullish formation. And it also means traders are in an accumulation phase while at this low price area.

Also, the EIA came out with the Weekly Natural Gas Report last week. Though underground storage use is climbing, it is still within the 5-year average range. As I wrote this just 25 minutes after the release, gas was up about 3%. That means the Street took the report well. The reason? For now, it doesn't look like storage capacity is overburdened.

Finally, the case for midstream companies also has not changed. They are still nearly full to capacity, and you can see in the EIA report that capacity is moving closer to full at almost 70% versus historical averages at nearly half of that. It means midstream companies still have the upper hand in contract negotiation for transport and storage of gas, crude, and products.

My concern at this point is if we see a fundamental change to the American economy, such as several million COVID-19-related deaths. You can see the stats here, and it shows America is currently at 1.5+ million known cases and 91,000 related deaths. That's a long way off from millions of deaths, yet we find states like Texas trying to open up and experiencing spikes in their known case count.

Another concern is if the price of natural gas breaks down in the same manner as crude oil, going close to zero or even negative. We now know that is possible, and if storage reaches capacity with no substantive increase in demand or cut in supply, we may see the same price action in gas.

Another possibility would be an OPEC-style interruption to the current status quo, bringing significantly more gas to market than can be swallowed by current demand. There is no organization like OPEC for gas, but that doesn't mean countries don't collude. I see this as less likely though, because countries that produce the most gas, like Qatar, have the most to lose. They will likely reduce supply to support the price, rather than some of the other options. It will cut into their government revenue, however, if they foolishly flood the market with supply to quash other producers - that also reduces revenue and allows other political consequences to ferment. The better option is to support prices with a cut in production.

As previously noted (see link to my article of two weeks ago), wells will be shuttered worldwide, hampering the supply. We will also see bankruptcies, M&A activity, consolidation of the industry, and much more. Choose your producers carefully, and in current market conditions, you must stay nimble and heavy on cash.

My recommendations do not change from two weeks ago. Please click the link at the beginning of the article to see them, as there is no need to repeat it here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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