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🔔 The Many Layers Of Supply & Demand

Supply and demand is one of a few universal laws of markets, trading and life in general.

It's the classic Economics 101.

But it's not always as simple as we'd like. It's layered. And yesterday we saw the perfect example 👇

 *US Natural Gas Prices Fall 7.7% to $8.571 After Reports of Explosion at Freeport LNG Facility in Texas— *Walter Bloomberg (@DeItaone) June 8, 2022 

The replies were full of confusion... 👇

Makes no sense to me. Explosion -> Less supply -> Price goes up (not the other way around). There must be more to the story.

Either this is a helluva over reaction and buy the dip opportunity or something else happened.

Wouldn't prices go higher?

Fall?? Why would they fall?

"There must be more to the story..."

And there is. We covered the nat gas situation in a previous note 👇

Basically, the US has been exporting a load of natural gas to help Europe wean themselves off Russian supplies (and because there's money to be made on the arbitrage between European and US prices, even after the extra costs of liquefaction & transport etc.) 👇

Let's break it down.

Supply has been reduced. Just not in the US.

In the multi-layered world of supply and demand, US demand was actually reduced by the outage, so available supply increased.

See, the Texas Gulf Coast facility is a U.S. Liquefied Natural Gas (LNG) export plant.

The facility demands natural gas so that it can be liquefied and shipped abroad.

If the plant can no longer process that natural gas (the facility will be closed for at least three weeks according to operator Freeport LNG), then that immediate demand is reduced.

What about the buyers?

This reduced Freeport demand isn't because they've suddenly got no-one to sell to. It's because they can't process the gas to supply it to their buyers.

There's still demand out there, and overall supply is reduced. So, European gas prices did move higher, gapping up 9% and surging on the open... 👇

Before falling back below that opening level as morning trade developed. Which, on the face of it, is also confusing... 👇

Unless you noticed that European storage is already filling up nicely... 👇

Europe’s gas inventories are accumulating at a record rate and are now significantly above the ten-year seasonal average as the region tries to protect itself against a possible disruption of supplies from Russia.

Abundant inventories have relieved some upward pressure on prices and are pushing calendar spreads into an increasingly steep contango as traders anticipate storage space will start to run out. ~John Kemp

Can't keep demanding more gas if you've got nowhere to store it...

John adds that the loss of export capacity can be absorbed by the market at the moment because:

  • Europe has been overbuying and overfilling gas storage and needed to slow pace of injections in next few weeks

  • U.S. has been over-exporting leaving domestic stocks too low and needed to slow pace of exporting

  • Rate of US→EU28 LNG exports needed to decelerate in next few weeks. Price signals would likely have enforced the slowdown in any event. Freeport explosion has enforced slowdown earlier

Now, this situation is the perfect example of why I'm not a fan of any non-professionals trading oil & gas right now.

These are complicated markets at the best of times, and the combination of low liquidity, seasonal nuances, storage and geopolitics is a toxic mix, even for the professionals.

Sometimes, it's best to do nothing... 👇

As world-renowned philosopher John McAfee once said:

Making money is easy.

The difficult thing in life is not making money, it's keeping it.

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