The negative correlation between energy and the stock market that we highlighted last Sunday (see AI Moves The Energy Sector) continued last week, unsurprisingly given the news. We had thought global natural gas markets were more vulnerable than crude oil to conflict, and this turned out to be true.

Qatar represents only 20% of global LNG trade and less than 3% of global gas consumption. So the closure on Monday of the Ras Lafan export complex, the world’s biggest LNG export facility, following an Iranian drone attack might have struck some as having only a minor impact on global supply.

Nonetheless, by Tuesday the Asian JKM benchmark had jumped 47%. The European TTF doubled before slipping to close +58% for the week. The US Henry Hub benchmark rose 2%, reflecting that there was limited extra gas that could quickly move from North America.

Our liquefaction capacity is around 15-17 Billion Cubic Feet per Day (NCF/D). It’s rising and will likely reach 30 BCF/D by 2030, but it’s not a spigot.

Russia has helpfully suggested it might cut pipeline gas supplies to Europe, home of the world’s dumbest energy policies. Its Europe-bound LNG tankers appear to be rerouting around southern Africa and avoiding the Suez Canal after a tanker was sunk in the Mediterranean. Russia blamed a Ukrainian maritime drone.

The spike in global LNG prices shows that even though Qatar supplies a small portion of total demand, replacing it isn’t easy. It’s expected to be several weeks before liquefaction restarts at Qatar’s Ras Lafan.

Most US liquefaction capacity is contracted out, but Venture Global (VG) retains more spot market risk than most, and investors quickly priced in a windfall gain for the company in selling that spare capacity at high prices.

Iran’s missile capability is already being neutralized. But drones are a different matter, offering an asymmetric means of combat as we’ve seen in Ukraine over the past four years. Drones are cheap and can be launched from a small area. While militarily they don’t represent much of a threat to US forces, Iran could deploy them in a form of guerilla warfare from near the Persian Gulf.

Identifying and destroying the drone manufacturing and storage facilities in Iran will be challenging. We think investors may be underestimating how long it will take for shipping to return to the Persian Gulf. Commercial maritime insurance rates rose from 0.25% of the value of a ship to 3%, a 12X increase.

Charter rates for Very Large Crude Carriers have more than doubled. Energy supplies from the region may be impeded for some time.

If a sustained period of high oil prices causes a big drop in the market – say, 10% or more – that will likely lead to a truce, since the White House uses the S&P500 as a report card more than past administrations.

VG and Cheniere both rallied on the expectation of profiting from the near term price spike in natural gas. But there’s a long-run bullish story here too. The force majeure declared by Qatar on its LNG exports highlights that it’s in a dangerous neighborhood. LNG contracts are 10-20 years. You can imagine VG adding a map of the Persian Gulf to its marketing materials. How sure can an Asian buyer be that Qatar’s supplies over two decades will be unimpeded by regional conflict? No similar risk exists for US shipments.

JPMorgan published their 16^th Annual Energy Paper last week. Mike Cembalest, Chairman of Market and Investment Strategy for JP Morgan Asset Management, does fantastic work and his latest piece is no exception. Cembalest casts a wide net and does note the looming overcapacity in the LNG market. This is a common concern of investors. Energy Transfer halted their Lake Charles LNG project in part because of this, although rising construction costs were also a concern.

Regassification capacity (i.e. imports) is growing too, although the chart shows liquefaction (export capacity) growing faster over the next few years. US exporters such as VG and Cheniere contract out capacity via Sale/Purchase Agreements (SPAs) for 10-20 years, so if LNG prices do fall due to oversupply, the SPA counterparties are the ones with exposure. Just last week Trafigura signed a five year deal with VG. The loss of Qatar’s LNG shipments is an additional long term benefit to US and Australian exporters.

We think the over-capacity fear is overdone.

Naples, FL draws a lot of visitors this time of year. It was my good fortune to have dinner recently with Jamie Schade from Miamisburg, OH, along with his good friends Phil Voelker and Les Berthy. A fascinating conversation covered the outlook for energy markets and LNG but also allowed time for market anecdotes since we’re all in finance.

Jamie has been a long-time investor in midstream, including for one client who has a cost basis around a seventh of current levels (he invested during the pandemic in 2020). Jamie’s clients have been well served by his sustained interest in, and exposure to, the sector.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

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