A big signal went off last week
did you see it?
Last week a big indicator flashed “pay attention to me”. It was natural gas.
Prices on the natural gas futures market shot up over 60% in a matter of 6 hours hitting a peak of $6.919. A lot of this had to do with future contract expiration and rollover but this would have never taken place if demand was weak. Cold weather in the northeast and across Europe has caused the demand for natural gas to increase. In addition to this, oil has gotten very expensive. I suspect that this has caused power plants to switch back to natural gas. In October last year, the story was flipped. The Wall Street Journal put out this article on the topic (pay-walled, sorry).
US power plants rarely burn oil. Coal and natural gas dominate the sector with oil burners typically reserved for backup. However, when oil plummeted in March of 2020, these companies took advantage of the situation and switched to oil burning plants. Now that oil has gotten expensive (current $87.97 WTI), these plants have switched back to gas.
The problem they are encountering is that supply has tightened. LNG exporters have been sending gas to Europe to take advantage of the arbitrage opportunity there.
In addition, Biden’s administration has blocked the development of gas pipelines. This makes transporting the gas to the power plants that need it, a logistical issue. The power companies would have to rely on trucks or trains to get the gas to these plants. This requires oil, which is getting very expensive and is increasing the price for transport.
I believe that this could lead to coal prices being driven higher next. Once gas and oil become too expensive, coal will then look like the cheaper alternative. The demand for energy is high and is not abating.
Gentlemen, February is right around the corner. Now is a great time to setup a romantic evening at the most expensive place in town in anticipation of Valentine’s Day. Your lady will love you for it!
Full Disclosure;
I am holding long-dated OTM USO and UNG calls.