I’m heading to New York next week to sit down with the team at one of my venture investments. The company operates large, industrial batteries for energy storage in Finland.
It’s an interesting company, and we aim to bring the same strategic focus to the United States.
If the U.S. government wants to move to more solar and wind power, we need batteries — a lot of them — and we need them everywhere to store electricity.
The conversation next week will center on how we plan to place batteries at U.S. ports — air, land and sea.
But that won’t be the only topic of conversation. We’ll also talk about the state of the European energy markets — notably the complete collapse of natural gas prices abroad.
What happened? A complete overcompensation for concerns around natural gas supply…
The Winter of Discontent
We’ll remember the 2022 market for three events — the Fed’s rate hikes and tightening cycle, the volatility of energy prices and the war in Ukraine.
These three factors have driven sentiment and capital alignment.
Earlier this year, markets panicked on concerns that Europe lacked enough energy. Its commitment to intermittent sources like wind and solar installed a panic in 2021. Then Europe’s reliance on Russia for natural gas was exposed…
It’s been a subject of intense scrutiny for years but went largely ignored in policy circles. Once the Nord Stream pipeline was blown up, natural gas prices were pushed to levels we hadn’t seen in years.
But — as is usually the case — the cure for high commodity prices became high commodity prices.
Panic set off a buying frenzy all around the globe. Policymakers in Europe started buying up natural gas wherever they could find it. The result was a glut of natural gas, with some companies struggling to find storage for their product.
On December 26, the natural gas inventories for the European Union’s 28 member nations hit 940 Terawatt Hours (TWh). That was the second-largest amount of supply over the last decade, trailing only 2019-2020.
By comparison, the EU had 600 TWh in storage on December 26, 2021. That’s a 56% increase in natural gas inventory.
Meanwhile, total stock has declined by just 56 TWh since the onset of the heating season in October. This is the smallest drawdown of natural gas ever.
A few factors drove this situation…
- Higher prices at the start of the season encouraged citizens to conserve.
- The governments encouraged conservation from the onset — cutting the power to town centers and swimming pools while advising people to save wherever possible.
- Higher prices fueled a surge in liquefied natural gas (LNG) imports worldwide.
Germany is about 40% through its heating season (the mid-point is January 15). And while temperatures have been colder, a warmer weather pattern in the middle of December helped reduce demand.
Europe typically experiences a much larger drawdown — but that hasn’t happened. Despite the narrative that U.S. natural gas exporters would have a field day with higher prices and more demand, the opposite appears to be happening.
In the U.S., natural gas prices have fallen to $4.48 — a stunning reversal from the near $10 we saw in late August. In Europe, the price pullback is even wilder. Natural gas prices have declined from 345 euros per Megawatt hour (MWh) to 81.91 euros/MWh.
This downward price pressure will be something to monitor in the weeks ahead. While LNG exporter Cheniere Energy Inc. (NYSE: LNG) is still holding up thanks to its long-term projects, its smaller rival Tellurian Inc. (NYSE: TELL) has seen its shares crater by nearly 62% since its August high.
I’ve largely avoided the natural gas markets this year due to the wild volatility. But I may start focusing on natural gas as a day trader in the next few weeks using leveraged ETFs.
I’ll talk more about those Friday, and how to trade them.
To your wealth,
P.S. And don’t forget to let me know if you have any feedback, questions about today’s issue or anything else. Just email us at email@example.com.
*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
Market Momentum Is Red.
But the markets did catch a nice rebound bid on Thursday. This could be the start of a tax-harvesting rebound, as investors start to buy heading into 2023. Today’s rally doesn’t change the fact that we’re likely heading lower in 2023 due to a variety of factors that I explained on Wednesday’s roundtable.