There are signs that perhaps investors and policy makers are beginning to appreciate the limitations of the current “green” transition. The Biden administration has taken the most favorable view on nuclear power in decades. Delaying nuclear closures (currently rumored) would be a huge step in the right direction. On the investment side, we are extremelyimpressed by the work being done at Breakthrough Energy Ventures. Founded by Bill Gates, BEV seems to understand the nuances of the energy transition. It is no surprise that BEV isheavily invested in nuclear power along with several of the technologies we discuss above.
Natural gas prices were flat in Q4. As we wrote last quarter, the forecasted rebound in US natural gas production has not taken place. Almost all gas wells that were shut-in back in April and May are now once again producing. However, EIA data indicates US production remains almost 5 bcf / day (or 8%) lower, year-over-year. Base production declines have overwhelmed the return of shut-in gas, a subject we covered at length in previous letters. Given today’s drilling activity, we believe steep production declines will continue into 2021. The EIA’s drilling productivity report expects US shale gas production will decline an additional 1.4 bcf /day between November and February. Although the US gas rig count has rebounded by 25 rigs in the last several months, today’s rig count (88 rigs compared with 200 as recently as mid-2019) remains far too low to hold gas production flat.
The only thing keeping natural gas prices from surging has been an extremely warm fall and start to the 2020–2021 winter. Both November, December and the first two weeks of January were 10% warmer than normal. The warm weather has reduced heating demand leaving US natural gas inventories approximately 10% higher than the five-year seasonal average. Weather models indicate that much colder weather will likely grip the North American continent in February.
While North America has been warmer than normal, Europe and Asia have both been much colder causing both natural gas demand and spot LNG import prices to soar. Both European and Asian spot LNG prices spiked into the mid $20’s and low $30’s per mmbtu, respectively in early January—both records. Concerns over global LNG deficits in the coming years have now emerged. Demand for US LNG exports reached an all-time high of nearly 10 bcf/d in December after having collapsed to only 3 bcf/d in July.
Seven years ago, we wrote extensively about global natural gas demand, and how emerging market demand would far outstrip the growth in future LNG supply. In the natural gas section of this letter, we have updated our 2014 LNG models. We continue to believe demand for LNG will outstrip supply as we progress through the decade. Tight LNG markets means strong demand for US exports as global consumers constantly attempt to lock in longerterm supply.
We remain extremely bullish on North American natural gas and recommend significant exposure to high quality E&P companies
