The natural gas market is changing rapidly in a way that very few people understand. In fact, I’m not even sure how to describe it. But the implicit investment opportunity right here in Australia is too obvious to ignore for a lack of words. So I’ll just use a jumble of them…
Gas used to be a localised and fragmented market. Supply and demand within regions operated fairly independently of each other. Or there were isolated links between certain gas supplying regions and demand centres.
The evidence for this claim is simple. European, US, Middle East, Asian and Australian gas prices sometimes diverge. And not just by a little bit.
At one point in 2022, the European natural gas price was about eight times higher than in the US. Even today, it can often be 3-5 times more.
Heck, the price of gas between the UK and Dutch trading ports can suddenly diverge to 30 times their usual level.
That sort of divergence can only exist in a localised market. Otherwise the opportunity to arbitrage the price would close the price gap quickly. Gas would be rerouted from places paying a cheap price to those paying an expensive price until the two equalise.
But when your gas supplies depend on whoever is on the other end of a pipeline or trade deal, price gaps can persist for long periods of time. The market doesn’t clear at an international level because there is no international market.
Today, I’d like to point out this is changing. The gas market is becoming more…what’s the right word?
‘Fungible’ is one way of putting it
An ounce of gold is the same everywhere in the world. A person doesn’t really care where the gold came from, who produced it or handled it. It’s all the same stuff, inherently so.
This fungibility creates huge advantages and efficiencies in trade. The market can quickly and easily adjust to price spikes or plunges by adjusting supply from everywhere. Also, you get a global price, which makes things more fair and economically efficient.
When I bought gold more than a decade ago in Vancouver and Dubai, the retailers looked up the same gold price.
The word fungible is not quite the right way to describe what has changed in the gas market. Natural gas and LNG were always fungible in a strict sense. One British Thermal Unit was much like another one. In some ways gas is more fungible than oil, which comes in many different grades and sweetness.
However, the change in the gas market is very similar to what would happen if gas went from being unfungible to fungible.
Segmented and separated markets that made gas in Australia, the UK, Canada, Kuwait and Japan worth a different amount can increasingly be considered the same. It’s becoming a resource that can be moved to meet demand wherever prices are high.
But if fungible is not quite the right word, what has changed for gas?
Is it more ‘diversified’?
The gas market is becoming more diversified. The countries buying gas are doing it from a long list of different places instead of relying on specific deals and relationships like they used to. This makes supply a lot more flexible.
“Seaborne” is another way to describe this change. It’s hard for the Russians to reroute a pipeline from Germany to China. But ships can suddenly change direction if prices move. And they have been doing just that.
But this sort of flexibility requires a lot of import terminals at ports with a lot of capacity. These are very big and expensive, as Australians know from the stories about places like Gladstone.
Similar import and export terminals have been getting built, rebuilt and upgraded rapidly in recent years. As these come to fruition, the global gas market will be far more…‘globalised’?
In 2022, the UK recorded record exports to the EU. While most Brexit cynics cried themselves to sleep over the figures, the clever ones pointed out it was because gas exports to the EU had doubled.
Now, UK gas production didn’t double, that’s for sure. What happened is that the UK’s operating gas import terminals allowed the country to pass seaborne gas onto the rest of Europe.
Since then, the Europeans have been building their own such import terminals as fast as they once built gas pipelines to Russia.
But even ‘diversified’ and ‘seaborne’ don’t quite describe what’s going on in the gas market. Whatever you want to call it, the point is that we’re getting a globally shared gas market.
One that’ll see prices around the world converge. And shocks in one place will become an international problem, but a far smaller one thanks to a more liquid market that can adjust faster.
Who cares about the gas market’s discombobulation?
Well, it could make you money.
Let’s take a purely hypothetical example…
Imagine the stock options of several Santos [ASX:STO] and Beach Energy [ASX:BPT] board members are about to expire.
Keen to give the share price a bit of a boost, they decide to form a joint venture…and blow up the Nord Stream 2 pipeline in the Baltic Sea.
Well, I’m sure they’d get contractors to do it for them. But you get the idea.
The ploy is designed to spike the global price of gas by disrupting gas supplies in one particular place. A higher gas price could cause ASX-listed gas stocks to fly, making the stock options worth more.
But would it work?
The answer in the past was, not really. Indeed, the two companies’ share prices didn’t get much of a kick in February 2022 or September 2022 when the gas price spiked on the invasion of Ukraine and sabotage of Nord Stream.
That’s because the market was too fragmented and localised. A huge spike in European gas prices didn’t really move ASX listed gas producers’ share prices. They weren’t selling into Europe much, especially on short term contracts. And gas supply to Europe wasn’t easily rerouted from places that Aussie gas companies were selling to, such as Japan.
What I’m telling you is that this is changing.
Even Aussie gas producers could soon move on geopolitical shenanigans on the other side of the world as the gas price becomes ever more…‘integrated’?
Woodside’s [ASX:WDS] hypothetical secret plan to blow up the Keystone Pipeline in North America really could work!
Similarly, a global gas glut would hammer our local gas producers far more than in the past, when they were more isolated from foreign competition.
Better get those Houthis some new drones…
Prepare for higher gas prices
While I’m a big fan of all these changes in the gas market, it’s not all good news.
You’d think that gas prices in Australia should be very cheap given how much we produce. But if you accept a global price for a commodity that is increasingly fungible, diversified, seaborne and whatever else, then it’s the global price that matters, not local supply.
Now that we have a global gas market, we are all subjected to each other’s problems. If Europe experiences another 2022 style gas crisis, then everyone is in the same boat. The US and Aussie gas price will increasingly mirror the EU’s, for example.
Who is this good and bad for? That depends on how you invest…
This isn’t the only shift threatening to upend commodity markets
My friend James Cooper reckons a similar radical shift is about to occur in mining. He’s uncovered a new technology that could revolutionise the time it takes to explore and develop deposits. And the companies that lead the charge could have an enormous competitive advantage.
Regards,
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Nick Hubble,
Editor, Strategic Intelligence Australia
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