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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Smart Money Sees Opportunity In Natural Gas Selloff

  • Even as Europe is filling its storage faster than anticipated, some areas of the natural gas supply chain will remain highly attractive under any circumstances.
  • While the short term outlook for natural gas is bearish, the energy commodity enjoys a very favorable long-term demand outlook.
  • One investment area funds are latching onto is natural gas infrastructure, including pipelines and storage facilities.

  With Russia cutting natural gas supplies to Europe, the bulls are eyeing bigger opportunities in natural gas, with funds parking their money into dividend stocks that could benefit from Europe’s energy crisis and protect against inflation.  

Funds are now parking their money into stocks such as Enbridge (NYSE:ENB), Cheniere Energy, Energy Transfer (NYSE:ET) and Pembina Pipeline Corp (NYSE:PBA),  as well as into ETFs such as the Alerian MLP (NYSE:AMLP). 

The thesis is that even as Europe is filling its storage faster than anticipated, it’s still below 2021 levels, and some areas of the natural gas supply chain will remain highly attractive under any circumstances provided that Europe continues to attempt to reduce–or remove–its dependence on Russia for energy. 

The bears will point out that natural gas markets have started the new month on the defensive amidst rising open interest and volume, exposing further weakness with prices looking likely to dip as low as $6.00 per MMBtu in the near-term.

They see a deeper correction coming. 

ICAP Technical Analysis analyst Brian LaRose told Natural Gas Intelligence that the bulls are in trouble because they “can not seem to find their footing, and they need to do more than just prevent natural gas from selling off. If they can not, a more substantial test of the $6.600-6.220 zone, even a drop to $5.730-5.713-5.689 is possible from here”.

LaRose’s sentiments are echoed to NGI by EBW Analytics Group senior analyst Eli Rubin, who sees “extremely weak” prices in the physical market.

While demand was particularly weak with Hurricane Ian, Cove Point LNG offline, and weather-driven demand at a seasonal nadir, the soft market is indicative of further downside risks,” Rubin told NGI.

The longer-term outlook is, however, favorable for the bulls.

The International Energy Agency (IEA) has predicted that global gas markets will remain tight next year as Russian piped gas supplies dwindle despite gas demand falling in Europe in response to high prices and energy saving measures. According to the agency, global natural gas markets have been tightening since 2021 despite global gas consumption declining by 0.8% this year as a result of a record 10% contraction in Europe and flat demand in the Asia Pacific region. However, global gas consumption is forecast to inch up by 0.4% next year.

Related: Saudi Arabia, Russia To Cut 1.05 Million Bpd In November

Gas consumption has fallen the most In Europe after contracting 10% in the first eight months of the current year driven by a 15% drop in the industrial sector as businesses curtailed production due to soaring prices. Meanwhile, Russian pipeline gas supply to Europe has dwindled to just a trickle after the shutdown of the Nord Stream 1 pipeline from Russia to Germany in early September

If Moscow carries out a threat to sanction Ukrainian energy firm Naftogaz, one of the last functioning Russian gas supply routes to Europe could be shut, exacerbating the energy crisis just as the crucial winter heating season begins.

Europe has managed to fill the gap of Russian pipeline gas this year, mainly through increased liquefied natural gas (LNG) imports. The IEA has forecast that Europe's LNG imports will increase by over 60 billion cubic meters (bcm) this year, more than double the amount for the rest of the globe. 

On the other hand, Asia's LNG imports are expected to stay at lower levels than last year for the rest of 2022, in large part due to high gas prices in Europe helping the continent draw in more cargoes. But while Asia overall is set for lower level LNG imports, China is the outlier. 

China’s LNG imports are expected to rise in 2023 under a series of new contracts concluded since the start of 2021 as well as a colder-than-average winter leading to additional demand from northeast Asia.  

According to the Wall Street Journal, Chinese companies that have signed long-term contracts to buy U.S. LNG have been selling their excess inventories to Europe and reaping big profits from the sales thanks to weak demand in China. Still, Chinese sales to Europe are not nearly enough to help the continent avoid potential shortages this winter with Europe depending more heavily on the U.S.

So where to park your money?

One investment area funds are latching onto is natural gas infrastructure, including pipelines and storage facilities.

“One of the attractive qualities of these investments is that their revenues are independent of the prices of the commodities. The firms charge fees for their services, and the fees often are adjusted for inflation. Their revenues and earnings depend on the volume of commodities passing through their facilities, not the price of the commodity,” Dividend Investor cites Bob Carlson as saying. His Cohen & Steers MLP & Energy Opportunity Fund is holding the following gas stocks on this thesis: 

Enbridge (NYSE: ENB), Cheniere Energy (NYSEAMERICAN: LNG), Williams Companies (NYSE: WMB), Energy Transfer (NYSE: ET) and Pembina Pipeline Corp. (NYSE: PBA).

Cheniere has the first-mover advantage in the LNG export market, and it is difficult for the bears to argue against this play right now. Long-term contracts and smart operations set it up for a bullish opportunity in a dramatically changing geopolitical energy landscape. This is an infrastructure play more than it is a natural gas commodities play because Cheniere isn’t a producer as much as it is an exporter. Cheniere is up over 64% YTD.

Energy Transfer has a very attractive dividend yield of 7.88%, and it’s been outperforming the broader market, up some 31% YTD, with insiders scooping it up heavily in recent months. 

Enbridge is a direct pipeline play on natural gas, and not as vulnerable to any further correction that may be in store for natural gas prices. While it’s the only one in this lineup that’s actually down YTD, it has a juicy dividend, and the bulls view it as a smart longer-term play for portfolios.

The same goes for Pembina, which is up a modest ~4% YTD, while Williams Company–a natural gas processing and transportation outfit–is up nearly 13% YTD. 

Beyond natural gas infrastructure plays, fund managers are also looking at MLPs (Master Limited Partnerships) in this space–particularly for their high dividend yields. MLPs are required by law to earn a minimum of 90% of their cash flow from commodities, natural resources or real estate, and the setup is one of a publicly traded company that has a general partner running day-to-day operations and investors acting only as limited partners. It means the liquidity of a publicly traded company with the tax benefit of a private partnership. MLPs distribute cash to shareholders instead of standard dividends. Profits are only taxes when investors are paid. Fund manager Bryan Perry recommends Alerian MLP Exchange Traded Fund (NYSE: AMLP). AMLP currently sports a juicy yield of 7.63%.

By Alex Kimani for Oilprice.com

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