Permissive attitude toward energy infrastructure bullish short term, bearish long term: Bill Perkins

Key Concepts

• Inflection Point in Natural Gas (Nat Gas): A turning point where previous trends may reverse due to conflicting factors.
• Capital Discipline: Producers limiting production due to low prices and demanding higher prices for investment.
• LNG (Liquefied Natural Gas) Exports: Increasing exports, particularly from the Henry Hub, impacting domestic pricing.
• Henry Hub: A key natural gas pipeline in Louisiana that serves as a major pricing point.
• Venture Global: An LNG company reporting efficiency gains in their operations.
• ARB (Arbitrage): Exploiting price differences between markets (e.g., Henry Hub vs. Europe) to profit.
• US Balances: Overall supply and demand of natural gas in the United States.
• South Central/Eastern Louisiana: Regions around the Henry Hub where gas supply may be tight.
• Cooling Season: Period of high natural gas demand for electricity generation for air conditioning.
• Marcellus Shale: A large natural gas reserve, particularly in Pennsylvania and West Virginia.
• Permian Gas: Natural gas produced in the Permian Basin, primarily in Texas.
• Energy Infrastructure: Pipelines, LNG plants, and other facilities for energy production and transportation.
• Global Trade War: Trade tensions and tariffs impacting global GDP and energy demand.
• Macro Strats: Macroeconomic strategists who may sell energy assets due to recession fears.

Natural Gas at an Inflection Point

Bill Perkins from Skylar Capital Management argues that natural gas is at an inflection point due to conflicting factors:

• Increased Supply: Producers are turning on wells that were previously curtailed due to low prices, increasing supply. This contradicts their earlier preaching of "capital discipline" and the need for higher prices to justify investment.
• Rising LNG Exports: Exports from the Gulf Coast, particularly around the Henry Hub, are increasing significantly (approximately 3.8 BCF a day and rising). Venture Global reported efficiency gains of 40% in their LNG operations, further boosting export capacity.
• Tug of War: A conflict exists between whether Henry Hub prices are more influenced by international markets (due to LNG exports) or domestic pricing.

Energy Policy and Geopolitical Factors

The discussion touches on the complexities of energy policy and geopolitical factors:

• Conflicting Signals: The "drill, baby, drill" ethos contrasts with trade and tariff dynamics, as well as geopolitical crosscurrents like a potential ceasefire in Ukraine and the return of Russian energy products.
• Long-Term vs. Immediate Solutions: While rising production is expected in the long term as regulations and permitting processes are navigated, immediate solutions involve debottlenecking existing LNG plants to increase export capacity.
• Permissive Attitude: A permissive attitude towards energy infrastructure is seen as slightly bullish in the short term but potentially bearish in the long term.

Impact of a Global Trade War

A global trade war is considered a bearish factor for energy:

• Reduced Global GDP: Trade wars and tariffs negatively impact global GDP, which is directly linked to energy use.
• Macro Strategy Selling: Macro strategists may exit energy investments due to recession fears or a slowdown in the global economy.

Potential Surprises and Counteracting Factors

Despite the bearish outlook, potential surprises could shift the market:

• European Prices: High natural gas prices in Europe (around $13-$15) compared to Henry Hub prices (around $4) create a large arbitrage opportunity.
• Infrastructure Bottlenecks: Questions remain about whether domestic infrastructure is sufficient to transport gas from production areas to export facilities.
• Regional Tightness: While overall US balances may appear fine, the South Central region, particularly Eastern Louisiana around the Henry Hub, could experience extreme tightness.
• Cooling Season Impact: The upcoming cooling season will reveal whether the gas supply is too tight, potentially leading to a violent price increase.

Infrastructure Development

The conversation addresses the need for more infrastructure development:

• State-Specific Challenges: Infrastructure build-out depends on the state's regulatory environment. New York State is considered anti-growth and anti-development, making pipeline projects difficult.
• Marcellus Shale: Despite the Marcellus Shale's proximity, New York faces challenges in accessing its gas due to drilling bans and pipeline restrictions.
• Permian Gas: Texas is expected to see more energy infrastructure development to move Permian gas to Louisiana.

Conclusion

The natural gas market is facing a complex interplay of factors, including increased supply, rising LNG exports, geopolitical uncertainties, and potential infrastructure bottlenecks. While a global trade war poses a bearish threat, high prices in Europe and regional supply tightness could lead to price spikes. The development of new energy infrastructure will be crucial in addressing these challenges, but progress will vary depending on the regulatory environment in different states. The upcoming cooling season will be a critical test of the market's balance.