The Implications of Negative Natural Gas Prices in Texas: Winners and Losers

Economic

Commodity

Summary:

Natural gas prices in West Texas are negative, with producers paying pipeline operators due to oversupply and limited pipeline capacity. This trend has persisted since March 11 at the Waha hub.

In West Texas, the price of natural gas has turned negative, compelling producers to pay pipeline operators to remove excess supply due to limited transportation capacity. This phenomenon, observed since March 11 at the Waha hub, underscores the challenges posed by oversupply and inadequate infrastructure in the Permian Basin.

The oversupply of natural gas in Texas contrasts with positive trading conditions in most other parts of the United States. While the benchmark price at Henry Hub in Louisiana remains around $1.80 per million British Thermal Units, the situation in Texas presents a unique set of challenges for investors and industry stakeholders alike.

The Waha hub, situated near Pecos, Texas, serves producers in the Permian Basin, where the extraction of both oil and natural gas occurs concurrently. However, the primary focus of operators in this region remains on oil production, driven by favorable prices exceeding $80 per barrel. Consequently, increased drilling activity targeting oil leads to a surplus of natural gas as a byproduct, exacerbating the existing oversupply issue.

Traditionally, excess natural gas has been disposed of through flaring, a practice that poses environmental concerns due to methane emissions, a potent greenhouse gas. Flaring not only contributes to climate change but also raises regulatory scrutiny, especially as new federal laws impose taxes on methane leaks. Despite efforts by Permian producers to reduce flaring instances, the need for a more sustainable solution remains imperative.

Addressing the oversupply challenge necessitates the expansion and optimization of the natural gas pipeline network in the Permian Basin. While some new pipelines have been constructed in recent years, capacity constraints persist, presenting opportunities for pipeline operators to capitalize on the demand for transportation services. Companies like Targa Resources and Kinder Morgan, with significant pipeline assets in the region, stand to benefit from fee-based revenue models that mitigate exposure to volatile commodity prices.

However, the pricing dynamics in Texas pose significant challenges for natural gas producers heavily reliant on commodity sales. While major integrated oil companies like Exxon Mobil and Chevron can offset losses from low natural gas prices with profits from oil sales, pure-play natural gas producers such as EQT and Chesapeake Energy face greater vulnerability to market fluctuations.

Looking ahead, natural gas producers pin their hopes on factors such as increased demand from exports or a resurgence in domestic consumption driven by weather conditions. Without a substantial uptick in demand, the oversupply situation in Texas could continue to weigh on national prices, underscoring the need for strategic adaptation and sustainable solutions in the energy industry.

The negative price of natural gas in West Texas highlights the complexities of supply and demand dynamics in the energy market. While pipeline operators stand to benefit from infrastructure expansion, pure-play natural gas producers face considerable challenges amid oversupply conditions. As stakeholders navigate these challenges, innovation and strategic planning will be crucial in shaping the future of the natural gas industry amidst evolving market dynamics.

Source: Barrons

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Commodity

Economic

Stocks

Rate cut bets suffer another blow

Hopes for an early rate cut by the Fed were dashed again on Monday following yet upbeat data release out of the US. The ISM manufacturing PMI rose more than expected in March, climbing above 50 into expansionary territory for the first time since September 2022. Moreover, the prices paid index also rose, hitting the highest since July 2022, in a fresh sign that inflationary pressures have not totally dissipated.

The strong PMI reading comes hot on the heels of Friday’s tamed core PCE print and Fed Chair Powell’s somewhat hawkish remarks. Whilst the CPI and PCE data continue to support the notion that inflation remains broadly within a downward trajectory, albeit an increasingly shallow one, other indicators underscore the Fed’s caution on the price outlook.

Subsequently, a rate cut as early as June is starting to look doubtful and the odds of a 25-basis-point reduction in the Fed funds rate has dropped to around 60%. More importantly, investors are now pricing fewer cuts for the whole of 2024 than what the latest FOMC dot plot projected only a couple of weeks ago.

Euro and pound feel the brunt of the dollar’s resurgence

Treasury yields surged on the back of the data, with the 10-year yield gaining 13.5 basis points. The jump in yields fuelled a fresh rally in the US dollar, which extended its gains to four-and-a-half month highs against a basket of currencies early on Tuesday.

The euro and pound both slid to one-and-a-half month lows against the US currency as a June rate cut remains in play for the ECB while investors are also increasingly confident that the Bank of England will be able begin its easing cycle during the summer, which contrast with the growing uncertainty surrounding the timing for the Fed’s first move.

Yen propped by more verbal intervention

The yen was still confined within a tight range, hovering around 151.60 to the dollar, as traders were vigilant about a possible intervention by Japanese authorities near the 152 level. Japan’s finance minister repeated on Tuesday that officials “will take appropriate action against excessive volatility”, prompting a slight firming in the yen.

The Australian and New Zealand dollars, however, were steadier today, with the former bouncing back quite strongly, likely due to the improving sentiment about China’s economy following yesterday’s encouraging manufacturing PMI readings.

The next focus for FX markets this week will be the flash CPI numbers out of the Eurozone on Wednesday, followed by the ISM services PMI, culminating with the nonfarm payrolls report on Friday. It will also be a fairly busy week for Fed talk. Williams, Daly and Mester are due to speak today and Powell will make another appearance tomorrow.

All calm on Wall Street

However, it remains to be seen whether any of it will do much to dent confidence on Wall Street. The S&P 500 slipped by just 0.2% on Monday even as yields spiked and rate cut expectations were scaled back. This probably suggests that investors want to see more evidence that there’s a substantial risk of inflation not falling to 2% within the coming months before turning bearish on stocks.

US futures were slightly in the red on Tuesday amid mixed sessions in Europe and Asia.

Gold sets sights on fresh record highs

What comes as a bigger surprise, though, is how gold has not only managed to avoid a selloff, but it has also scaled fresh heights in unchartered territory. The precious metal hit a new all-time high of $2265.49/oz on Monday before pulling back after the ISM data. But it is rebounding today, in a sign that other forces such as central bank buying and demand from private investors remain as much, if not more of a driving force than the inverse relationship with bond yields.

Oil futures were also up on Tuesday ahead of tomorrow’s OPEC meeting where no change in quotas is expected. But escalating tensions in the Middle East is keeping the upside pressure on prices.

To stay updated on all economic events of today, please check out our Economic calendar

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Cohen

Forex

Looked at through a currency market lens, the verdict from hedge funds on the recent wave of major central bank policy meetings could not be clearer - don't bet against the mighty dollar.

The latest Commodity Futures Trading Commission data show that speculators are going 'all in' on a stronger dollar, particularly against G10 currencies, and especially the Japanese yen and Swiss franc.

Figures for the week through March 26 show that speculative CFTC accounts increased their net long dollar position against a range of G10 and emerging currencies to $13.5 billion, the highest since September 2022.

The net long position against G10 currencies was even higher at $17.64 billion, a level not seen since July 2022. In both cases, most of the surge has come in the last few weeks during which time the Federal Reserve, European Central Bank, Bank of Japan and Swiss National Bank all held policy meetings.

From a relative rates perspective, the dollar has emerged the victor. Fed policymakers lifted the median 'dot plot' and long-run neutral rate projections, the BOJ's historic rate hike was deemed to be 'dovish', the ECB could ease policy before the Fed, and the SNB was the first major central bank to cut rates.

Even those who are more gloomy on the dollar's longer-term prospects recognize its relative attraction in the short term.

"The bar remains high ... to boost the dollar substantially, but signs of continued economic resilience in the US could still keep the greenback on the front foot in the short term," Capital Economics senior economist Jonathan Peterson wrote last week. Long Dollar Bets Explode, As Funds Join the Dots_1

Long Dollar Bets Explode, As Funds Join the Dots_1

Long Dollar Bets Explode, As Funds Join the Dots_2

Yen, Swissie Carry That Weight

Speculators appear to agree.

In the week through March 26 they increased their net short yen position to 129,106 contracts, CFTC data show. That's close to the 132,000 contracts net short in February which was funds' biggest bet against the yen in over six years.

A long position is essentially a bet that an asset will rise in value, and a short position is a wager its price will fall.

Funds have increased their net short yen position in nine of the last 11 weeks, the two outliers being in the run up to the BOJ's historic rate hike in March.

CFTC funds' short yen position is now worth $10.65 billion and the renewed bearishness is probably one of the reasons the Japanese currency last week hit a 34-year low against the dollar.

CFTC data also show hedge funds grew their net short Swiss franc position in the latest week to the largest in almost five years. It now stands at 22,627 contracts, a bet worth more than $3 billion - both are the highest since June 2019.

Funds also continued to reduce their net long euro position which now stands at 31,194 contracts, a $4.2 billion bet on the euro appreciating. Both are the smallest since September 2022. Long Dollar Bets Explode, As Funds Join the Dots_3

Long Dollar Bets Explode, As Funds Join the Dots_3

Long Dollar Bets Explode, As Funds Join the Dots_4

Source: Reuters

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Alex

Commodity

Russia’s plan to rapidly expand liquefied natural gas exports is stalling due to US sanctions that are delaying shipments from a major new project.

The Arctic LNG 2 plant began production in December, but has so far not managed to export any gas due to the US restrictions. It had to sharply reduce output in February, according to data seen by Bloomberg. The Vedomosti newspaper, which was the first to report the drop in production, said Arctic LNG 2 was unable to export fuel and didn’t have enough space to store it.

Novatek PJSC, the major shareholder of the plant located above the Arctic Circle, had aimed to begin deliveries by the end of March. It didn’t immediately respond to a request for comment.

The Russian company is in talks to sell its first shipment to buyers in China, but the timing is still unclear amid fear of US retaliation, according to people with knowledge of the talks who asked not to be named as the information isn’t public.

Novatek’s travails show how tough it will be for Russia to achieve its target of roughly tripling LNG exports by 2030. The country — the world’s biggest gas exporter before the invasion of Ukraine caused Europe to shun its piped supplies — exported around 32 million tons of the super-chilled fuel last year, a fraction of the total global trade of 412 million tons, according to ship-tracking data.

The US imposed targeted restrictions on Novatek in November that all but forced out other investors in Arctic LNG 2, including TotalEnergies SE and Mitsui & Co., which have both declared force majeure. The sanctions have also upended plans for the plant to receive specialized icebreaker vessels that are needed to traverse the freezing waters. Russian LNG Expansion Plan at Risk Due As US Sanctions Delay Exports_1

Russian LNG Expansion Plan at Risk Due As US Sanctions Delay Exports_1

In February, gas production within the Arctic LNG 2 project was 83 million cubic meters, compared with 250 million cubic meters in January and 425 million cubic meters in December, according to the data seen by Bloomberg.

Novatek has been speaking with buyers in China about selling cargoes on a spot or long-term basis, but few firms are willing to take the risk of potentially being entangled by US sanctions, the people said. The company’s plan is to send most — if not all — of the LNG via the Northern Sea Route to China, and it is also trying to find Indian buyers, they said.

That passage would offer the quickest direct way of getting the gas to China when it’s open for navigation in the summer. When the waters around the project aren’t blocked by ice, a wider range of vessels can also access the facility and export its gas.

The first production train at Arctic LNG 2 is designed to produce 6.6 million tons of the fuel a year. Together with another two trains, which aren’t online, total capacity for the facility is planned at nearly 20 million tons.

Source：Bloomberg

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Devin

Economic

Overall manufacturing activity in the euro zone took a further turn for the worse in March, contracting at a steeper pace than in February, but there were signs of recovery in Italy and Spain, surveys showed on Tuesday.

Demand continued to fall, according to the surveys which nevertheless demonstrated an uptick in optimism, suggesting the region may soon stage a wider recovery.

HCOB's final euro zone manufacturing Purchasing Managers' Index (PMI), compiled by S&P Global, dipped to 46.1 in March from February's 46.5, beating a preliminary estimate of 45.7 but staying below the 50 mark denoting growth in activity for a 21st month.

An index measuring output, which feeds into a composite PMI due on Thursday and is seen as a good gauge of economic health, rose from February's 46.6 to 47.1, improving on the flash estimate of 46.8.

"Today's PMI results are an indicator of the massive challenges European manufacturers are facing. Materials shortages have abated somewhat, but the outlook remains uncertain," said Goetz Erhardt at Accenture.

French manufacturing weakened at a steeper pace last month - although the contraction was not as severe as a preliminary estimate suggested - while in Germany, Europe's largest economy, the downturn in the sector which accounts for about a fifth of the country's GDP continued.

Defying the wider euro zone dip, Spanish factory activity expanded in March for a second month and Italy showed signs of recovery after 11 straight months of contraction, earlier figures showed.

Irish manufacturing contracted in March after briefly returning to growth a month earlier. Its PMI has sat below 50 for most of the last 17 months.

In Britain, outside the European Union, manufacturers reported their first overall growth in activity in 20 months thanks to recovering demand in their home market, according to its PMI that added to signs last year's shallow recession has ended.

New orders in the euro zone fell for a 23rd month despite factories cutting their prices at the fastest pace since November. Any sign of easing inflationary pressures will likely be welcome news to the European Central Bank as it attempts to bring inflation back to target.

Inflation fell in six economically important German states last month, preliminary data showed, suggesting national inflation will continue its downward trajectory.

ECB President Christine Lagarde told European Union leaders last month the euro zone's inflation rate was set to keep on falling while economic growth would start picking during the year.

Euro zone factories reduced headcount again but, in a sign managers expect future output to pick up, a gauge of optimism rose to 57.4 from 57.1, its highest since April last year.

Source: Reuters

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Alex

Economic

Sheltering from the sun on a street corner, Kridsada Ahjed rues the day he got involved with the loan sharks who now gobble up most of his daily earnings.

“I went to the loan sharks because people like me – with no assets or savings – cannot qualify to get help from legitimate banks,” Ahjed, a 40-year-old motorcycle taxi driver, told Al Jazeera.

“Now almost everything I make in a day goes towards paying the interest on my debt.”

Kridsada is far from alone.

Thailand’s household debt reached nearly 87 percent of gross domestic product last year, according to the Bank of Thailand, among the highest on earth.

Nearly $1.5bn of that debt is estimated to be made up of high-interest informal loans.

Kridsada’s personal crisis is part of a wider malaise that has gripped Thailand’s economy.

After decades of solid growth, Thailand is displaying all of the hallmarks of the middle-income trap, analysts say, where a combination of low productivity and poor education leaves much of the workforce stuck in low-paid, low-skilled work.

“Thailand suffers not only from the slow return of demand from major export markets, but also from the changing nature of globalisation that hurts its competitiveness,” Pavida Pananond, a professor of international business at Thammasat Business School, told Al Jazeera.

“International trade is being driven more by value-added services that require higher local skills and capabilities. This requires a systemic upgrading of the labour force and local firms’ sophistication beyond short-term handouts and investment incentives.”

Whereas other Southeast Asian countries are bouncing back strongly from the economic shock of the COVID-19 pandemic, Thailand has faltered.

Thailand’s economy grew just 1.9 percent last year, according to state economic planners, compared with growth of 5 percent or higher in the Philippines, Indonesia and Vietnam.

Even neighbouring Malaysia, a significantly more developed economy with lower expectations for growth, registered a 3.7 percent expansion.

Despite the recovery of Thailand’s key tourism sector, which accounts for about one-fifth of the economy, its prospects are not looking much better in 2024.

The World Bank on Monday said it expected the Thai economy to grow 2.8 percent this year, slightly better than Bangkok’s own estimates.

The Philippines, Indonesia, Vietnam and Malaysia are expected to see growth of between 4.3 and 5.8 percent.

Thai Prime Minister Srettha Thavisin, who came to office in August after nearly a decade of military rule, has declared the economic situation a “crisis”.

Srettha, a property mogul-turned-politician, proudly calls himself the “salesman” of Thailand.

Since taking power in a compromise with the royalist establishment to block the reformist Move Forward Party, the 62-year-old political neophyte has travelled the world to seek out free trade deals and promote the country as a base for global manufacturing supply chains.

But after years of Bangkok shirking from fundamental economic reforms, there are fears the economy may be resistant to a quick fix.

Critics say that Thailand’s military leaders for years turned off global investors, became too reliant on China’s economic rise and squandered the potential of young Thais by neglecting to fund an education system capable of producing a workforce suited to the digital era.

The World Bank said in a report released last month that two-thirds of Thai youth and adults were “below the threshold levels of foundational reading literacy”, while three-quarters had poor digital literacy skills.

Meanwhile, Thailand’s English language proficiency ranks among the lowest in the Association of Southeast Asian Nations (ASEAN).

To stimulate the economy, Srettha has proposed providing a 10,000-baht ($280) cash handout to virtually every Thai aged more than 16 – a policy economists and political rivals have slammed as wasteful – expanding visa-free entry to more countries, and legalising casinos.

“He faces political risks from ‘doing’ and ‘not doing’ these measures,” Move Forward Party deputy leader Sirikanya Tansakul told Al Jazeera.

“With the big cash handout scheme, he faces legal risks from unlawful government borrowing and of coalition discontent. But if he cannot implement this biggest electoral campaign, he faces public distrust.”

Srettha has also become embroiled in an unusually public dispute with the Bank of Thailand, which he has urged to cut interest rates to spur growth.

The central bank has refused to lower the benchmark rate, currently set at 2.5 percent, stressing the need to safeguard its independence.

In a bleak assessment earlier this year, Pranee Sutthasri, a member of the central bank’s Monetary Policy Department, said the country had “seriously lost its competitive edge”.

Sutthasri pointed to global forces – including China’s slowdown and the wars in Ukraine and the Middle East – as well as the kingdom’s failure to invest in training the population for the digital economy.

“It will continue to lag behind if, instead of making products related to artificial intelligence technology, Thailand keeps making downstream electronics products that people no longer want,” she told reporters in late January.

For Srettha, who was not the public’s first choice at the polls, a bad economy carries political risks.

“Political undercurrents that continue to meddle in domestic politics are red flags for investors,” said Pavida of Thammasat Business School.

“And now they have choices elsewhere without needing to wait until Thailand sorts itself out.”

For many Thais struggling to get by, the faltering economy brings more pressing practical concerns.

Hoo Saengbai, a 61-year-old lottery ticket vendor in Bangkok, said her monthly income has more than halved to as little as $110 over the last few years as people cut back on unnecessary spending.

“I’m not so sure about this government or any government any more,” she told Al Jazeera. “I’m just trying to put food on the table one day at a time. I eat if I earn anything, I don’t eat if I don’t earn. That’s all there is.”

Source: Al Jazeera

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Ukadike Micheal

Stocks

Economic

Stock markets in the Gulf opened higher on Tuesday, driven by expectations of increased oil demand in China and the U.S. amidst escalating geopolitical tensions in the Middle East, which led to a rise in crude prices. Saudi Arabia's benchmark index advanced by 0.2%, supported by gains across various sectors including finance, healthcare, materials, and energy. Notably, Rajhi Bank, the world's largest Islamic lender, saw an increase of 0.7%, while Saudi National Bank, the kingdom's largest lender, rose by 1.1%.

In Dubai, the benchmark index edged up by 0.2%, propelled by a 1.1% rise in Emaar Properties and a 0.5% gain in Dubai Islamic Bank. Meanwhile, Qatar's benchmark index inched up by 0.1%, with Qatar Islamic Bank gaining 0.5% and Qatar Navigation rising by 3.5%. However, Commercial Bank and Qatar International Islamic Bank experienced declines of 5.1% and 1.1% respectively.

In Abu Dhabi, the benchmark index remained relatively unchanged, with conglomerate Alpha Dhabi Holding falling by 0.8% and First Abu Dhabi Bank shedding 0.6%. Conversely, Presight rose by 4.3% and ADNOC Drilling gained 0.8%.

The surge in oil prices, a key catalyst for the Gulf's financial markets, was driven by Brent trading at $88.3 a barrel, rising by 1% amid heightened geopolitical tensions and positive manufacturing activity in China and the U.S. These factors provide an optimistic outlook for oil demand, although concerns persist regarding the potential impact of escalating conflict in the Middle East on regional supply.

From a technical standpoint, the upward momentum in Gulf markets reflects investor confidence amidst improving economic conditions and robust oil prices. The positive performance of key sectors such as finance, healthcare, and energy underscores the diversified nature of the region's economies and their resilience to external shocks.

However, market participants remain vigilant of geopolitical developments, as any escalation in tensions could disrupt oil supplies and negatively impact market sentiment. Additionally, the ongoing manufacturing expansion in China and the U.S. bodes well for oil demand, but uncertainties surrounding global trade dynamics and inflationary pressures warrant close monitoring.

The early gains witnessed in Gulf stock markets are driven by a confluence of factors including expectations of higher oil demand, geopolitical tensions in the Middle East, and positive manufacturing data from key economies. While the current market sentiment remains positive, investors should remain cautious and monitor geopolitical developments and economic indicators for potential market fluctuations in the future.