The “Widowmaker” Energy Trade

“Natural gas is the best transportation fuel. It’s better than gasoline or diesel. It’s cleaner, it’s cheaper, and it’s domestic.”

-T. Boone Pickens

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November 25, 2024— Oil wildcatter T. Boone Pickens went in big on natural gas 15 years ago. He saw the clean-burning fuel as the future of energy in the United States.

His idea of using natural gas to power fleets of buses, garbage trucks, and other vehicles never took off as he hoped before he passed away in 2019. It’s just one of many ways that natural gas has been dubbed the “widowmaker” trade for moving at the wrong time and costing investors heavily.

Yet, Pickens did call things correctly. Natural gas has been one of the great, unsung American success stories of the past 20 years.

Thanks to good, old-fashioned American innovation and know-how, the energy industry has developed the ability to vastly increase both natural gas supply – and meet global demand.

First came fracking. While it doesn’t always get a good rap, fracking does allow oil and gas fields that were once considered played out to get a new lease on life, bringing old fields back to life with years of production. That’s increased production and supply, keeping prices low.

Meanwhile, it’s now been about 15 years since the energy industry has been able to liquefy and export its natural gas resources. That turns the natural gas market into a global operation, not a local one.

Historically, America’s gas abundance kept prices far below the world average. Now, we can sell our excess production and help lower prices globally.

The 2024 winter season in the U.S. looks to be somewhat mild. That should keep prices down; the ability to increase exports globally remains a growth play both for American energy production and for narrowing the U.S.A.’s trade gap with the rest of the world.

But as gas prices look cheap now, they could be setting up for a big push higher. Natural gas is a dense form of energy that can be used in everything from transportation needs to powering facilities.

Today’s AI boom is grabbing headlines for the rising role of nuclear power. But nuclear plants take time to get approved and up and running. Natural gas can fill the gap in the meantime. We see a bright future for it ahead.

So does Dominic Frisby, who looks more closely at some of the dynamics in the natural gas space today, with a close look at how production in the U.S. may have peaked for now and what it means.  ~ Enjoy, Addison

The Shale Gas Revolution Is Dead… Here’s What to Do Now

Dominic Frisby, The Flying Frisby

It’s difficult to look beyond bitcoin and MicroStrategy (NASDAQ:MSTR) at the moment, the later in particular. Nobody expected this, not even Chairman Michael Saylor. The returns have been astonishing. A couple of readers have reported to me that the gains have been life-changing. Wow! What an email to receive.

It’s easy to get hubristic when you have a big win. Instead, let us express gratitude for the good fortune that has smiled upon us.

But look beyond we must, and so today I want to look at what I can only describe as a stealth bull market – natural gas. The price is creeping up, and few are talking about it.

Natural gas is a bit like silver: if it can disappoint, it will. So we begin this piece with that reminder. Natural gas has broken the soul of many a wiser man than me.

On the other hand, the next five years look pretty positive.

It’s obvious that the world is going to go nuclear now, and that Small Modular Reactors (SMRs) are going to provide the power AI so badly needs. However, it will be a good five years before they on stream, so what is going to provide the power in the interim?

The answer is natural gas.

There is a problem, however: Supply.

America’s Gas Wells Are Drying Up

The North American Shale Gas Revolution dramatically changed the outlook for fossil fuels. Peak Oil was a huge theme leading up to the Global Financial Crisis, and then it disappeared, almost overnight.

Between 2005 and 2020, U.S. natural gas production grew by 90%, with shale accounting for the bulk of it. In 2005, shale gas made up about 5% of U.S. natural gas production; by 2020, it was over 75%. By 2017, the U.S. had become a net

exporter, especially of more transportable liquefied natural gas (LNG).

The price, meanwhile, plummeted. Good for consumers!

Here’s the long-term chart so you can see those price declines since 2005: from almost $16 to $3.50 today (as low as $1.50 earlier this year, where it formed an attractive double bottom—you know how I like those).

Obviously, we in the UK and Europe pay way more for our natural gas than they do in North America. It’s so dumb; we have enough to supply ourselves in the UK. But we don’t because fracking is deemed environmentally damaging. So we import gas from abroad, which is produced by, you guessed it, fracking. I guess if it is fracked somewhere else, it’s less harmful.

Then there are the transport costs and the environmental costs that come with that.

Anyway …

Spanning Ohio, New York, West Virginia, and Pennsylvania, Marcellus is the largest natural gas-producing field in the United States, contributing over 25% of production. In 2010, output was 2 billion cubic feet per day (bcf/d). By 2023, it exceeded 35 bcf/d, but production has been falling for almost a year now. We are currently at 26.7 bcf/d.

The next largest is Haynesville, in Louisiana, Texas, and parts of Arkansas. Extraction costs here are higher, and production stands at 16 bcf/d, but it is slowing here too, according to analysts Goehring & Rozencwajg.

One of the few areas of growth is the Permian Basin, in Texas and New Mexico, currently around 23 bcf/d, but even there, growth is modest.

Now, it might be that the reason for stagnating growth is low prices — they often are — and higher prices will result in increased production. They usually do. That is the way with commodities.

But natural gas prices have already doubled this year, and they keep on creeping up.

The other interpretation is that the North American Shale Gas Revolution has passed its peak.

With America’s new president, you can expect plenty more investment in production than under the Democrats, which should bring the price down. However, the gas price has actually risen—from $2.70 to $3.50—since the election.

It might also be that Russian gas taps come back online to the EU sometime next year, which means America will lose its new market.

But all of this conjecture is factored into the price. And that is rising.  ~~ Dominic Frisby, The Flying Frisby

Regards,

Addison Wiggin,
Grey Swan

P.S. A few weeks ago, you may recall, we wrote about a debit card called Glint that can be used to spend your gold holdings like cash.

As part of our post-election U.S. tour last week, we saw the card in action. Following a fantastic Gulf seafood meal in New Orleans, fellow Grey Swan traveler David Tice then whipped out his Glint card to pay for it.

David showed me on the app how he had just used the card in Costa Rica, Argentina, and Columbia the week before the conference. One of its features is that it works on the Mastercard network, so it is widely accepted globally.

Together, we then hosted a reception for Glint founder and CEO Jason Cozens. He’s a good guy and was a hit among potential investors. Glint is easily the best-kept secret of this year’s New Orleans Investment Conference.

As part of our enthusiasm, Jason and I have worked out a handshake deal to offer the Glint card for free to Grey Swan members.

As we were both traveling — me back to Baltimore, Jason back to London — we have not put the specifics on paper yet, so stay tuned. I’ll have details for you as soon as possible.

Send your thoughts on gold, natural gas, or any related musings here: addison@greyswanfraternity.com.