A Secular Bull Market Is Underway

The Australian reports:

Thermal coal and LNG prices have both hit fresh peaks as the global energy crisis bites ahead of the northern winter, but Australian coal and natural gas producers may struggle to lift supply to take advantage of surging prices.

Ya think so!

The energy crisis is not one of surging demand. It’s one of too little supply that is unable to adjust to changes in demand.

That’s the crux of the problem in Europe and the UK right now, where natural gas prices have gone exponential.

For that, you can thank years of virtue signaling by politicians and environmental groups about the evils of oil and gas. At the same time, hundreds of billions of dollars were invested in renewables (with the help of billions in taxpayer subsidies), which moved well ahead of the capacity of storage technology to make use of that investment.

The UK and Europe are a few years in advance of Australia in terms of their green credentials. Which is why things are particularly acute there right now in terms of gas prices. Sure, there are clearly other factors at play. But it’s hard to argue the situation wouldn’t be so dire if not for the headlong rush towards ‘net zero’ without proper planning.

Short-term relief may be on its way though. Overnight, oil and gas prices fell after Russia offered to increase supply. How nice of them…

From Bloomberg:

Gas prices fluctuated wildly on Wednesday — surging a staggering 60% over just two days in Europe before sliding fast after Russia’s President Vladimir Putin said the country is ready to help stabilize global energy markets.

Dutch and U.K. futures plunged more than 7%. That’s after hitting fresh records earlier over increasing fears of energy shortages across the region. In the latest testament to how global gas markets have become, U.S. natural gas prices also plunged by as much as 8.3% after settling at the highest level in 12 years just a day earlier. Oil futures accelerated losses. The swift pullback in prices — after a week of almost uninterrupted gains — underscores just how extremely volatile energy markets have become in recent days, fanning fears of inflation around the world.

What was that?

Fanning fears of inflation?


This is a supply issue, not a demand issue.

Soaring energy prices will more than likely sap final demand. It will hit business profit margins, and where rising costs can be passed on, consumers will take the hit leaving less left over for discretionary spending.

Don’t expect central bankers to get this though. The Bank of England is already talking about potentially having to raise rates to ward off the inflationary hit from the energy supply crunch.

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Obviously, higher energy prices will feed into higher consumer price inflation numbers in the months ahead. But central banks are making a mistake thinking this is a result of strong economic growth driving demand.

No, the underlying cause of this energy crisis is the result of years of underinvestment in future oil and gas supply.

Raising interest rates in the face of an energy supply crunch would just be dumb. It’s just adding an expense on an expense.

But we are talking about central bankers here. So I wouldn’t be surprised what they do.

When it comes to the oil and gas stocks, it’s important to realise that most companies in the LNG space have long-term contracts that are generally linked to the oil price, not the ‘spot’ LNG price.

Where producers can pump excess capacity to sell into the spot market is a bonus, but it’s often not enough to move the profit needle substantially.

But Australia’s largest LNG producer, Woodside, appears to have a bit of spare capacity to sell into the spot market. As The Australian reports:

“Woodside may have three to five spot cargoes this winter that could fetch over $US500m just by themselves,” Credit Suisse analyst Saul Kavonic said.

“It used to be a very rare event to see a ‘gold’ LNG cargo sold, referring to a cargo worth more than $US100m. Now they are selling strings of gold cargoes and may need to term a ‘platinum’ cargo in case a $US200m cargo is sold.”

For the broader market, you’d expect rising energy prices to act as a headwind at some point. Perhaps it will take some company announcements relating to cost pressures impacting earnings or retail sales coming in below optimistic ‘reopening’ forecasts before it’s priced in.

Speaking of reopening, it’s happening soon for NSW. Presumably, the other fear-riddled states won’t be too far behind. It will be interesting to see how the increase in energy usage that comes with increased movement impacts Australia.

Whatever the shorter-term impacts of this energy supply crunch, one thing is for sure — the green and ESG trend will lead to much higher traditional energy prices in the future. The transition to renewables will occur because of record-high fossil fuel prices.

A secular bull market is underway.


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Greg Canavan,
Editor, The Rum Rebellion

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