(Wallace Refiners) Anomalies and risk events of 2022 are far from over, with the next crisis developing in the U.S. natural gas market, according to Goehring & Rozencwajg Associates managing partner Leigh Goehring.
As markets are just coming to grips with the aftermath of Russia’s invasion of Ukraine, followed by a surge in commodities like oil and agriculture, the next black swan event is already around the corner.
“The big crisis that is going to take everyone by surprise in the next six months is going to be here in North America, with the U.S. natural gas prices,” Goehring told Wallace Refiners. “This will be the real shocker because it is a full-blown crisis that is already taking place on a global basis in gas. The U.S. has been completely immune from all this over the last year or so. Even today, gas prices in Europe and Asia are at around $30 per mmbtu versus $8.20 per mmbtu in the U.S.”
The concern here is that the U.S. might not be able to stay immune to this crisis for much longer as any unpredictable event could trigger a deficit in the U.S. natural gas market, especially with the U.S. now increasing its export levels.
“There could be some black swan event here in North America that will suddenly cause the U.S. gas market to swing from structural surplus to structural deficit. If that happens, U.S. gas prices could surge. They could triple or possibly even quadruple,” Goehring warned.
Investor apathy to this risk is “foolish,” the Goehring & Rozencwajg Associates managing partner pointed out.
“Our models suggest the decades-long protection from international price swings, enjoyed by the North American gas market, is about to change,” he said. “Slower-than-expected shale growth will push the U.S. market into structural deficit for the first time in 15 years. Almost immediately following the shift, U.S. prices will converge with global gas prices. Given today’s $35 per mmbtu international gas prices, prices could surge by almost four-fold.”
The big change in 2022 is the export levels. In the last six years, the U.S. went from being a minor player in the global LNG export market to the world’s largest LNG exporter, Goehring noted.
“Six export facilities currently operate, and a seventh, Calcasieu Pass, will add an additional 1.7 bcf/d of capacity, bringing total US LNG export capacity to 13 bcf/d, surpassing both Qatar and Australia, formerly the world’s two largest LNG exporters,” he said. “Surging shale production has far exceeded LNG export demand. The U.S. natural gas market has remained in structural surplus even with surging LNG exports. That is all about to change,” Goehring said.
This could happen within the next six months as inventory levels shrink. The U.S. is entering a season of very low inventories. If temperatures are high in the summer, the U.S. could fall even further behind. “This is exactly what happened in Europe in the summer of 2021,” Goehring stated. “And if inventories continue to be substandard relative to where they should be, the market is going to panic like it did in Europe.”
Gas price increases could hit the U.S. market as the Federal Reserve desperately tries to control inflation with its oversized rate hikes.
“By the end of this fall, inflation could be over 10%, driven by the potential surge in natural gas prices and the fact that oil is setting up for a big surge in the second half of 2022. Those things alone will give you 10%,” Goehring said.
This will force the Fed to raise rates much higher. “There is a huge amount of momentum in U.S. economic growth, and it could hold up much better than people think,” he added.
The concern for Goehring is not how the economy holds up but what the Fed could uncover as it raises rates above 2%-3%.
“When Powell raised rates in 2018, he hiked the fed funds rate to 2.25%-2.5%, and that uncovered all sorts of problems in the financial system, with the repo market falling apart. If the rates get back up to 2%-3%, we’ll find another massive financial trouble that will expose itself, and Powell will be forced to stop raising rates,” Goehring described.
What about the gold market?
Goehring is very bullish on gold in the long-term, projecting the bull market to peak at around $15,000 per ounce by the end of this decade.
“There is a massive bull market right in front of us. In the last month, we have started to increase our gold exposure. We are getting close and closer to this massive blow-off that will happen in the gold space,” Goehring pointed out.
However, in the short-term, gold could still see a move back to $1,600 an ounce, which is a great point to get into the market. The reason for the retreat in May is the Federal Reserve stepping up rate hikes.
“When the Fed starts to raise rates, that puts downward pressure on gold. [But] I am a raging bull,” Goehring said. “We are confident that we are getting closer to a resolution to the upside, especially with gold and silver physical ETFs strongly suggesting that western investor interest is returning and gold trading cheap relative to oil.”
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