How to invest as natural gas prices soar

When even Russian president Vladimir Putin feels he has to intervene to take some of the steam out of natural gas prices, it suggests that something is very wrong with the market.

Yet that’s exactly what happened on Wednesday this week. Putin said Russia “can reach another record of deliveries of our energy resources to Europe, including gas” (of course, he also noted that swift approval for its contentious Nord Stream 2 natural gas pipeline to Germany could help).

In any case, his comments helped to send the price of gas lower from its recent spike. But prices are still many times higher than they were last year.

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So – to offset your rising domestic energy bill, if nothing else – who’s making money from this and can you invest in them?

Why are we so low on natural gas?

For a number of years the world has enjoyed an oversupply of gas. Now the opposite problem is plaguing energy markets.

Natural gas prices have shot up for several reasons.

A cold winter in 2020 meant that global demand was high, which depleted existing supplies in storage. Usually gas reserves would be filled up in summer, but instead, producers were running on reduced output because they had to catch up on maintenance which had been delayed due to lockdowns.

So we’re starting from a position of lower-than-normal reserves – and that’s even as the wider economy is recovering post-lockdowns.

This has then been exacerbated on many fronts by the weather. Summer heatwaves in Europe prompted a big increase in demand for air conditioning and refrigeration, while in the UK, calmer weather has caused a dramatic drop in windspeeds, cutting the amount of electricity produced by wind turbines.

That’s driven demand for gas up significantly, as it is the UK’s main alternative fuel for power stations.

Adding to this has been unusually high demand for liquefied natural gas (LNG) in Asia as well – this is a global shortage. As the Financial Times points out, “Europe is usually the end market for a substantial share of the world’s LNG. However, competition for the commodity has meant European LNG imports declined sharply this summer.”

LNG is simply natural gas converted to liquid form, making it easier to transport by sea rather than via pipelines. Clearly however, this requires specially-equipped ships and ports to move and unload safely.

So who really benefits from a surge in LNG demand? As Hellenic Shipping News Worldwide points out: “in the booming market for supercooled natural gas, the most precious commodity is the ship.”

LNG freight prices already reflect this buoyant demand for gas. The daily charter rate for a tri-fuel diesel-electric (TFDE) vessel capable of carrying 160,000 cubic metres of LNG to Pacific Basin ports hit $76,000 a day on Tuesday, the highest level seen since February this year.

“A typical spot LNG cargo of 3.4 trillion British thermal units delivered into North Asia in November is currently worth about $135m and any rise in shipping costs will further drive up cargo costs,” adds Reuters.

So what are the best ways to invest in natural gas?

Gas prices will clearly continue to be volatile. But given the surge in prices we’ve already seen and the need to fill up storage for next year, it’s hard to imagine that producers and those providing essential services and equipment for the industry aren’t going to continue to benefit for some time.

The most obvious beneficiaries are the producers. One of the most straightforward plays for UK investors is Royal Dutch Shell (LSE: RDSA). As Russ Mould of AJ Bell puts it: “ a wall of cash looks set to come the company’s way thanks to the recent surge in energy prices… Shell’s decision to pivot towards natural gas over the last decade has left it well positioned for the current market.”

The Motley Fool suggests French group TotalEnergies (Paris: TTE) (previously Total) as another option to consider, as it’s the world’s second-largest publicly-traded LNG operator. And for those considering investing in US stocks, Cheniere Energy (NYSE: LNG) is America’s leading LNG producer and also a major exporter. It’s also working on carbon-neutral LNG cargoes.

Another option is to consider shipping stocks. My colleague David Stevenson looked at a couple of shipping portfolio companies to consider in a recent issue of MoneyWeek magazine. If you’re not already a subscriber, get your first six issues free here.