Key takeaways

• Cyclical commodity analysts should focus on undervalued assets rather than trending ones.
• Natural gas is undervalued despite strong demand drivers in the US market.
• The shale gas industry is stabilizing, similar to the shale oil industry in 2018.
• Transportation costs dominate natural gas pricing, not extraction costs.
• The global LNG market is shaped by long-term contracts and varied pricing mechanisms.
• Qatar’s low-cost LNG fields give it a competitive market advantage.
• Europe’s gas prices are influenced by seasonal demand and geopolitical factors.
• LNG facility gestation periods are longer than shale gas wells, affecting supply.
• Once operational, LNG facilities run at full capacity with limited flexibility.
• The rise of LNG exports hasn’t significantly increased domestic gas prices.
• Analysts should look beyond current market trends to identify undervalued opportunities.
• The US has disrupted traditional LNG pricing by offering different contract terms.
• Seasonal variations in demand lead to fluctuating gas prices in Europe.
• Shale gas industry behavior is becoming more predictable and stable.
• Understanding transportation logistics is crucial for natural gas market analysis.

Guest intro

Bob Brackett is managing director and senior research analyst at Bernstein & Co. He is one of the most knowledgeable commodities analysts in the world, covering markets from natural gas to uranium and rubber. His expertise includes analyzing the impact of geopolitical events on global commodity prices and US exports.

Why cyclical commodity analysts should focus on undervalued assets

• Analysts often focus on trending commodities, but undervalued assets offer more opportunities.

• I am most useful when I am least loved and the problem with being a cyclical commodity analyst is everyone will ask me about whatever is the highest on the screen… you should be looking at the things that no one’s really talking about.

  — Bob Brackett

• The cyclical nature of commodity markets means trends can shift rapidly.
• Identifying undervalued assets requires a strategic perspective on market dynamics.
• Focusing on less popular assets can lead to discovering hidden market opportunities.
• Analysts should leverage their expertise to identify assets with unrecognized potential.
• The tendency to follow market trends can lead to missed opportunities in undervalued sectors.
• Understanding the cyclical nature of commodities is key to successful analysis.

The undervaluation of natural gas in the US market

• Natural gas is currently undervalued despite strong demand drivers.

• Henry hub is unloved okay sitting at $3 an mcf while we have all of these underlying demand drivers in the US so it’s the forgotten molecule today.

  — Bob Brackett

• The market dynamics for natural gas are not reflecting its true value.
• Strong demand for natural gas does not align with its current market valuation.
• Analysts should consider the underlying demand factors influencing natural gas.
• The undervaluation presents potential opportunities for investors.
• Understanding the demand drivers is crucial for accurate market analysis.
• The forgotten status of natural gas in the market could lead to future value corrections.

Stabilization in the shale gas industry

• The shale gas industry is stabilizing, similar to the shale oil industry in 2018.

• You’re starting to see the light where in the same way that the shale oil industry became well behaved kind of in 2018 the shale gas industry…starts to behave itself.

  — Bob Brackett

• Stabilization indicates a maturing industry with more predictable behavior.
• The industry’s stabilization could lead to more consistent market dynamics.
• Historical behavior in the shale oil industry provides insights into shale gas trends.
• A stable industry environment can attract more investment and growth.
• Analysts should monitor industry behavior for signs of further stabilization.
• The comparison to shale oil highlights potential future trends in shale gas.

The impact of transportation costs on natural gas pricing

• The majority of natural gas costs are associated with transportation, not extraction.

• 90% of the cost of gas is in the movement… it’s all a game of distance and markets and therefore there is no one price.

  — Bob Brackett

• Transportation logistics play a critical role in natural gas pricing.
• Understanding transportation costs is essential for accurate market analysis.
• The variability in transportation costs leads to diverse pricing across markets.
• Analysts should consider transportation dynamics when evaluating natural gas markets.
• The economic factors influencing pricing are crucial for market understanding.
• The focus on transportation costs highlights the complexity of natural gas markets.

Long-term contracts and pricing mechanisms in the global LNG market

• The global LNG market is heavily influenced by long-term contracts and pricing mechanisms.

• The global LNG market’s about 500,000,000 tons per annum… the Qataris have the lowest cost fields… for half a century we’ve always had oil linked contracts for LNG… the US comes along and breaks that and says… just pay me TTF.

  — Bob Brackett

• Long-term contracts create stability but also limit market flexibility.
• Different pricing mechanisms reflect diverse market strategies and conditions.
• The US has disrupted traditional LNG pricing with alternative contract terms.
• Understanding these pricing structures is crucial for market analysis.
• Qatar’s low-cost fields give it a competitive advantage in the LNG market.
• Analysts should consider the impact of contract terms on market dynamics.

Qatar’s competitive edge in the LNG market

• Qatar has the lowest cost fields for LNG, dominating the market despite long-term contracts.

• The Qataris have the lowest cost fields… they could give away the gas and they sign these really long term contracts.

  — Bob Brackett

• Low-cost fields provide a significant competitive advantage in global markets.
• Long-term contracts ensure market stability but limit flexibility.
• Qatar’s pricing strategy allows it to maintain market dominance.
• Understanding cost structures is essential for analyzing competitive advantages.
• Analysts should consider Qatar’s market position when evaluating global LNG dynamics.
• The competitive landscape is shaped by cost advantages and contract strategies.

Seasonal and geopolitical influences on Europe’s gas prices

• Europe’s gas prices are influenced by seasonal demand and geopolitical factors.

• Now we’re entering the shoulder season in the spring and in the fall it’s beautiful outside in the northern hemisphere and people don’t need that same amount of gas and so shoulder season is normally a terrible price for gas.

  — Bob Brackett

• Seasonal demand variations lead to fluctuating gas prices.
• Geopolitical factors add complexity to pricing dynamics in Europe.
• Understanding these influences is crucial for accurate market analysis.
• Analysts should consider seasonal trends when evaluating European gas markets.
• Geopolitical events can have significant impacts on pricing and demand.
• The relationship between demand and pricing is key to market understanding.

The logistical challenges of LNG facility development

• The gestation period for LNG facilities is significantly longer than for shale gas wells.

• The gestation period and of course these aren’t gestational periods of an LNG facility is four years wow.

  — Bob Brackett

• Longer development timelines affect supply responsiveness in the LNG market.
• Understanding these timelines is crucial for market analysis and forecasting.
• The logistical challenges of LNG development impact market dynamics.
• Analysts should consider development timelines when evaluating supply trends.
• The comparison to shale gas highlights differences in market behavior.
• Supply responsiveness is a key factor in LNG market analysis.

Operational constraints of LNG facilities

• Once built, LNG facilities typically operate at full capacity with limited flexibility.

• LNG facilities once built run full right there’s an ability to debottleneck and run above nameplate but basically there is no spare capacity to a certain degree.

  — Bob Brackett

• Operational constraints limit the flexibility of LNG facilities.
• Full capacity operation affects supply dynamics and market behavior.
• Understanding these constraints is crucial for accurate market analysis.
• Analysts should consider operational characteristics when evaluating LNG markets.
• The lack of spare capacity highlights the importance of efficient operations.
• The operational dynamics of LNG facilities impact market supply and demand.

The impact of LNG exports on domestic gas prices

• The rise of LNG exports has not significantly raised the price of domestic gas consumption.

• There is no strong evidence that that extra 10 going to 20% of the demand wedge has changed price… what changes price is where supply equals demand.

  — Bob Brackett

• Domestic gas prices remain stable despite increased LNG exports.
• Understanding supply and demand dynamics is crucial for market analysis.
• The relationship between exports and domestic pricing is complex.
• Analysts should consider the impact of exports on domestic markets.
• The stability of domestic prices highlights the resilience of the US gas market.
• The focus on supply and demand dynamics is key to understanding market behavior.