by Bryan Perry

March 15, 2022

Even before the invasion of Ukraine, it was already a broadly held view that coming out of the pandemic, a synchronous global economic recovery would put upward pressure on oil prices due to the cancelation of the Keystone pipeline and more-stringent federal and state regulations on exploration and production.

The rally in crude oil prices, as measured by West Texas Intermediate (WTI) and North Sea Brent, have generated huge profits and fortunes for investors that acquired a decent portfolio weighting prior to the war in Ukraine. In yet another catalyst for higher oil prices, the nuclear talks ended with Iran due to Russia’s interference with the negotiations. A Wall Street Journal report on March 8 said, “The Saudis have signaled that their relationship with Washington has deteriorated under the Biden administration, and they want more support for their intervention in Yemen’s civil war, help with their own civilian nuclear program…and legal immunity for Prince Mohammed in the U.S., Saudi officials said. The crown prince faces multiple lawsuits in the U.S., including the killing of journalist Jamal Khashoggi in 2018.”

Suffice it to say that the underlying bid for oil over the near- and intermediate-term looks very firm. WTI crude closed at $109.33 per barrel last week after spiking over $130 earlier in the week. The issue of any further geopolitical risk of interruption or lack of new supply to the global market could send prices above $150, with a new floor being $100, given the current demand curve and sanctions on Russian imports.

West Texas Intermediate Crude Oil Price Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

To this point, the stock market has done an efficient job of pricing in the present prosperity in the energy sector, and likely some of the future expectations, knowing that at some point, demand destruction sets in, slowing economic growth. The biggest impact of high oil prices is on the consumer and commercial transportation industries, whereas coal, natural gas, and renewables power the electric grids worldwide – at least until solar, wind, hydro, bio-mass, and geothermal sources make up meaningful percentages.

Europe is in a most precarious position about a major energy deficit heading into summer and winter, when demand for cooling and heat is highest. “It’s estimated, the electricity generation from coal power plants is 1,023,968 GWh in the Europe. This represents 22.9 percent of Europe’s total electricity generation. Gas power plants generate 22.0 percent of Europe’s electricity with nuclear power plants being most dominant at 25.5 percent” (source: https://www.datacenterdynamics.com/).

Simple math says coal and natural gas account for about 45% of total electricity generation in Europe, with a heavy emphasis on transforming coal-fired plants to natural gas plants in the interim of building out new renewable facilities. Europe is focusing big on renewables, but the grid is not yet equipped for intermittent sources like wind and solar to completely fill the gap.

CNBC reported on February 24 that, “The EU is the largest importer of natural gas in the world, according to the Directorate-General for Energy for the EU, with the largest share of its gas coming from Russia (41%). The region used to be independent for natural gas, but then the North Sea reserves dried up” (https://www.cnbc.com/2022/02/24/why-europe-depends-on-russia-for-natural-gas.html).

A byproduct of the Ukraine war has Germany halting the Nord Stream 2 Baltic Sea gas pipeline project, that was being built to increase delivery of Russian natural gas to Germany, which now seeks energy independence of Russian gas. Of course, this is much easier said than done, and sets up the conversation of which countries and companies will fill the gap for Germany and fill Europe’s natural gas deficit.

European Union Natural Gas Import Price Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Natural Gas Price (USD/MMBtu) Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Imported natural gas in Europe is trading at over five times the price of natural gas in the U.S., which closed at $4.77/MMBtu last Friday. As we enter the spring “shoulder season,” when demand lessens, nat-gas prices are typically at their lowest levels for the year. There is a rising narrative that the U.S. will be the biggest solution for providing major natural gas supplies to Europe, which argues well for considering natural gas stocks during low-demand season with the intent of seeing price gains in high-demand season.

One of the clearest and most respected voices in the business of trading energy is Mark Fisher, MBF Trading Founder and CEO. He gave an interview on CNBC on Wednesday, March 9, claiming that the price of U.S. natural gas could easily double going into the winter season of 2022-23, against a backdrop in intense export levels to Europe to replace Russian imports.

I think he is spot on in his analysis and looking at how many of the natural gas-related stocks have pulled back from their recent peaks, this might be the best opportunity to buy on dips in the E&P, LNG, pipeline, and shipping companies. Very few investment themes outside of commodities are working due to massive inflation headwinds, tighter Fed policies, and multiple contractions due to slower growth rate forecasts.

As the first quarter comes to a close soon, some prudent rotation into blue-chip assets within the natural gas sector (plus a good dose of patience) could produce big year-end returns. Not many disparities are as large as that between U.S. and European gas prices. Either gas prices in Europe come way down, or prices in the U.S. trade higher. The latter seems to be more likely, creating this investment opportunity.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
The Messy Geopolitics of Global Energy

Income Mail by Bryan Perry
U.S. Natural Gas Prices Could Rally Big by 2023

Growth Mail by Gary Alexander
Beware the Ides of March (Again)

Global Mail by Ivan Martchev
Nickel’s Monstrous Short Squeeze

Sector Spotlight by Jason Bodner
At Times Like This, What Would Warren Do?

View Full Archive
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About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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