Natural gas is a non-renewable source of energy that is heavily traded on the futures market. It is one of several energy commodities traded alongside Crude Oil WTI, Crude Oil Brent, Gasoline RBOB, Heating Oil, and Ethanol. Natural gas has a wide range of uses, including in power generation, appliances, furnaces, and transportation.
Invesco S&P 500 Equal Weight Energy ETF (2021-today)
The energy sector has posted decent gains over the past few years, spurred by increases in energy consumption and global conflicts.
Natural Gas (2020-today)
Over the past four years, natural gas has underperformed, peaking during the beginning of the Russo-Ukraine war and then decreasing back to pre-war levels. The performance of natural gas has been rather unremarkable due to multiple factors, including geological changes, gas reserves, weather patterns, and drilling production.
Gas demand is projected to outgrow the demand for other forms of non-renewable energy sources, including coal and oil.
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Currently, there is a moderate level of natural gas reserves. The past two winters have been unusually warm due to El Niño, therefore, less gas was consumed, fewer rigs were produced, and a buildup in reserves formed. As shown in Figure 1, since the peak of El Niño, gas production has slowed and leveled off before decreasing in North America. Figure 2 illustrates that there is currently a moderate amount of natural gas in reserves. Figure 3 shows that as a result of this pattern, fewer rigs were operational.
With the supply and natural reserves of gas at the current level, usage can be supported assuming all other factors remain constant. However, the weather patterns that led to this situation are reversing.
Source 1
In the winters of 2022-2023 and 2023-2024, we experienced an El Niño cycle; however, for 2024-2025, we will be in a La Niña cycle, which will cause significantly colder winters.
“The High Arctic will continue to cool and provide more ice than in the past - and thus colder air will be available. The warm El Niño event of early 2024 will be replaced by a La Niña event that flips the Equatorial Pacific Ocean water temperatures from very warm to much colder than normal. In addition, the Central North Atlantic Ocean will likely be cooler than it has been in recent years and this will set up what is called - Negative Atlantic Oscillation (NAO) that will also be instrumental in altering the weather patterns in Europe during the 2025 winter.” [2]
The decrease in weather temperatures will increase the use of natural gas for heating over the 2024-2025 winter period and future winter periods for the next 3-5 years. As natural gas reserves decrease, the reduction in North American production due to the previous increase in reserves will not keep up with the use of reserves, forcing the price of natural gas higher and increasing imports of natural gas.
Currently, the largest exporter of natural gas in OPEC is Iran [3]. The use of reserves by the USA will likely result in Europe and North America relying more on OPEC, and with the death of Ebrahim Raisi, there exists the possibility that if Raisi is succeeded by a less hardline candidate, the exports of Iranian natural gas could increase, although this is purely speculative.
A major future driver of demand for natural gas is coming from data centers needed to power AI. Renewable power forms such as solar and wind are too inconsistent to power data centers alone, so these centers are forced to supplement with natural gas. Furthermore, renewable energy isn’t able to keep up with the demand of data centers, meaning non-renewable forms of energy must be used. Many 'Green' data centers use natural gas and balance the use with purchased green credits [4]. AI industry rapidly grows, so too will its demand for natural gas.
In conclusion, the weather patterns that have allowed for lower reserves and extraction of natural gas will reverse this winter, leading to colder temperatures, increased use of natural gas, decreased reserves, and higher prices for natural gas.
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