Myra P. Saefong

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Sept. 22, 2022, 12:46 p.m. EDT

How investors may benefit from a dive in natural-gas prices as winter looms

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By Myra P. Saefong

Natural-gas prices have seen a steep decline from their peak last month, likely providing an opportunity for investors ahead of the winter heating season.

“The market has greater confidence that Europe will have sufficient gas supplies to get through winter without running out of gas,” said Rodney Clayton, portfolio manager for the Virtus Duff & Phelps Select MLP and Energy fund /zigman2/quotes/204761209/realtime VLPIX -1.69% .

As of Sept. 19, the European Union’s working gas in storage stood at 960.26 terawatt hours, which is at 86% full, according to data from the Gas Infrastructure Europe’s Aggregated Gas Storage Inventory .

Europe managed to build its supplies ahead of schedule. Th e European Commission had proposed measures to ensure supply security at reasonable prices for the winter, including a minimum 80% gas storage level by Nov. 1.

Russia  suspended the flow of its gas  through the Nord Stream 1 pipeline to Germany earlier this month, following the Group of Seven’s decision to set a price cap on Russian crude.

With Russia’s gas flows down significantly, Europe has relied partly on increased liquefied natural-gas imports and fuel switching to balance the market, says Clayton, adding that uncontracted U.S. LNG is also largely being shipped to Europe , where global prices are highest.

All of that helps ease Europe’s gas prices, with European benchmark Dutch TTF gas futures at 182.90 euros ($182.85) per megawatt-hour on Sept. 21, down 47% from a record of more than €346 in late August. U.S. natural-gas prices /zigman2/quotes/210189548/delayed NG00 +1.29% have fallen by 20% to $7.779 per million British thermal units on Sept. 21, from a 14-year high settlement of $9.68 on Aug. 22.

Read: Why natural-gas prices climbed to a 14-year high

Expectations for global demand destruction have also contributed to the price pullback. Recent inflation readings in the U.S., Europe, and the United Kingdom increase the likelihood of continued central bank interest-rate hikes, said Steve Kolano, managing director at investment and financial advice firm, Integrated Partners. That will slow economic growth and, potentially, energy demand, he said. On Sept. 21, the Federal Reserve delivered its third straight 75 basis point interest-rate hike.

Still, Kolano believes the drop in natural-gas prices offers a potential opportunity for investors ahead of winter, given the nature of energy demand in Europe and globally. “Should the winter be warmer than normal, supplies may begin to build and ease pricing pressures,” he said.

The story’s a bit different in the U.S., where catalysts for the natural-gas price drop include “rising domestic production, recent storage injections that have come higher than anticipated, and expectations for lower power demand as temperatures fall,” said Phil Wrenn, senior credit research analyst at Aegon Asset Management.

“The U.S. is expected to be in an adequate position on natural gas this winter,” he said, assuming average winter weather and normal heating demand. However, natural gas is “always a weather driven market,” and prices will “likely remain volatile, and upside volatility will remain, especially if weather driven demand is higher than expected.”

European prices  will remain in a state of “heightened volatility” as reliance on flows of LNG and other sources “remains critical, coupled with the [EU’s] ability to contain its energy crisis” this winter, said Wrenn.

For investors, portfolio manager Clayton points out that LNG exporters, project developers, and technology providers remain in strong competitive positions. His fund holds some of those, including Cheniere Energy Inc. /zigman2/quotes/206202121/composite LNG +0.58% and Targa Resources Corp.  /zigman2/quotes/200494488/composite TRGP +0.93% .

“Today’s shortage of LNG is more of an infrastructure problem than a true supply issue,” he said. “The market needs more LNG terminals and pipelines to connect…stranded supply with demand centers.”

US : U.S.: Nasdaq
$ 11.64
-0.20 -1.69%
Volume: 0.00
Nov. 28, 2022
US : U.S.: Nymex
$ 7.29
+0.09 +1.29%
Volume: 22,296
Nov. 29, 2022 9:46a
US : U.S.: NYSE American
$ 171.42
+0.99 +0.58%
Volume: 173,287
Nov. 29, 2022 9:56a
P/E Ratio
Dividend Yield
Market Cap
$42.38 billion
Rev. per Employee
$ 72.96
+0.67 +0.93%
Volume: 47,757
Nov. 29, 2022 9:55a
P/E Ratio
Dividend Yield
Market Cap
$16.36 billion
Rev. per Employee

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Myra P. Saefong is on the markets team in San Francisco. She has covered the commodities sector for MarketWatch for more than 10 years. She has spent the...

Myra P. Saefong is on the markets team in San Francisco. She has covered the commodities sector for MarketWatch for more than 10 years. She has spent the bulk of her years at the company writing the daily Futures Movers and Metals Stocks columns and has been writing the weekly Commodities Corner column since 2005. Myra has been with MarketWatch since 1998 and holds a master’s degree in English literature.

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