Is Natural Gas The Next AI Trade?

During their recent episode, Taylor, Carlisle, and John Love discussed Is Natural Gas The Next AI Trade?. Here’s an excerpt from the episode:

[Tobias] Let’s talk natural gas. I understand that the U.S. is the Saudi Arabia of natural gas. We’ve got giant natural gas deposits as a strategic asset for the U.S. Talk to us about the natural gas market. What do we need to know?

[John] Yeah. I mean, from 10 years ago when we exported no natural gas to now when we’re exporting 18, well, we’re exporting about 16 billion cubic feet a day. Capacity right now is 18.3. So that’s a huge increase compared to where we were. There’s a lot of terminals and facilities that have come online that didn’t exist 10 years ago. And there’s another, I’m going to say four and a half billion cubic feet capacity coming online the next two, three years. And it’s really come online at a time when it’s desperately needed.

Europe needs our natural gas. Yeah, we’re shipping some to Asia, but I think 68% of it goes to Europe with the outbreak of the Ukraine war and then the Iran war that’s been desperately needed. But it’s interesting because U.S. natural gas, we have absolutely tonnes of it. It’s a byproduct of crude oil production, which of course has exploded with the shale revolution. We really don’t have a problem with natural gas and that’s kept prices low. It’s always been a domestic market.

It still is. It’s going to be much more affected by weather than exports. But that export story is becoming part of the story.

And over time, as we expect, as we export more and as it starts getting used in data centres, I think that’ll start. I mean, as the data centres are built out, as the AI story continues, which a lot of that is powered by natural gas, there’s a lot of demand there that is increasing. So where it’s been, I would say, almost a weather story for forever, it’s becoming a demand story, both domestically and internationally with the exports.

Australia actually is another big producer. Qatar is a big producer. And that’s the big thing going on is their big LNG facility was severely damaged.

They’re trying to get back to about 50% capacity in a few months, 80% capacity by the end of the year, which is pretty quick. But there’s still going to be 20% of their capacity that’s going to be offline for years. And so that’s probably about 4% of global LNG supply.

So that’s something that’s been taken out completely. And that is a year’s long story that’s probably adding a bit of a premium to natural gas for the US, for Australia, and everybody.

[Tobias] It’s long been sort of known as the widowmaker trade, the gas trade, because for whatever reason, it’s extremely volatile. There seems like there’s a lot of downward pressure on prices most of the time, but every now and again, there’s a massive spike. And that takes people out.

Is that how the market trades? Or how do you see the market?

[John] Yeah, it’s definitely a very volatile market for people that enjoy volatility. And we have some of those fans of our funds. Natural gas certainly does that.

The whole time that we’ve had our natural gas fund out, 19 years, UNG, not the whole time, but the majority of the time it has been under pressure. And that is, again, is primarily this abundance. And then you get a cold weather snap, or you get something that takes out production, and it does spike up.

But I think that now, one thing that’s, I don’t know that the volatility goes away, but I do think that the price is probably a bit inflationary. The highs in the channel is going to go up just because of that increased demand. But it’s definitely an exciting market, and I think will remain so, as long as we have heat, cold, and global disruption.