We believe the North American natural gas market has reached a...

We believe the North American natural gas market has reached a turning point. Significant shifts now taking place carry profound investment implications for the next twelve months.

Our stance, which was cautious for almost a decade, turned bullish in the first quarter of 2020 when Henry Hub was at $1.43 per thousand cubic feet (mcf). In our 1Q20 letter, we wrote an essay titled “The Bull Market is Here,” stating: “If production were ever to falter, a massive bull market would result. That moment has arrived.”

By summer 2022, Henry Hub gas surged more than six times, eventually reaching $9.68 per mcf as Russia’s invasion of Ukraine spread fears of a global natural gas shortage. However, back-to-back warm winters and an ill-timed fire at a US LNG export facility overwhelmed the nascent bull market and gas retracted its entire move, selling off to within five cents of the June 2020 low.

Although it may seem like a strange time to write a bullish lead essay on natural gas, it was equally strange to make a bullish call in the spring of 2020, immediately before gas rallied 553%.

Our research suggests this rally could be even stronger.

Bearish sentiment reached a fevered peak in the first quarter of 2024. The 2023-2024 North American winter was 5% milder than normal – on par with the extremely warm winter of 2011-2012. A lack of heating demand pushed prices sharply lower. Gas for delivery at Henry Hub fell 30%, broke $1.50 per mcf three times, and eventually bottomed at $1.48 per mcf on March 26th. Over the past twenty-five years, Henry Hub only broke $2.00 five times: in 2002, 2012, 2016, 2020, and earlier this year.

By some measures, natural gas pessimism in March was the worst in history.

Gas bottomed amid a broader energy sell-off in 2002, 2016, and 2020. This year, natural gas reached $1.48 per mcf, with oil trading at a healthy $81 per barrel. Although a barrel of oil contains six times as much energy as an mcf of natural gas, WTI traded for an incredible fifty-two times Henry Hub natural gas – a nearly 90% discount on an energy-equivalent basis.

Relative to oil, gas has only ever been cheaper once before, following the equally mild 2011-2012 winter.