Natural Gas
Commodity volatility will continue its rising trend since 2014. The US is on the brink of a major election, the outcome of which could reduce its willingness to engage with the outside world. So, states seeking to carve out their own spheres of influence are incentivized to raise the economic costs to the US and discourage its influence in their regions. These states can do this by interfering in key trading routes in their regions. As a result, geopolitical threats to maritime chokepoints are a structural as well as cyclical problem and will persist due to the revival of superpower competition.
The market’s pricing of a soft landing means that geopolitical risks are becoming more, not less, relevant in 2024. US domestic divisions will invite challenges as foreign powers rightly fear that US policy will turn more hawkish after the election.
The attacks on Red Sea commercial tankers by Iran’s Yemeni proxies, the Houthi movement, are an inflation risk inasmuch as they lengthen voyage times for any shipping forced to avoid the Bab el-Mandeb Strait. The risk of an expansion of these attacks is, in our view, limited, given Iran’s inability to project naval power in the region.
Global instability will continue in 2024 – whatever happens afterward. Slowing economies will exacerbate already high geopolitical risk and policy uncertainty stemming from the US election and foreign challenges to US leadership. Overweight government bonds, defensive sectors, the Americas versus other regions, aerospace/defense stocks, and cyber-security stocks.
Natural gas storage levels in the US and EU are sufficient to balance flowing supply and demand this winter, assuming normal weather. China continues to invest in domestic production, and to diversify supply sources to compensate for a lack of storage. Longer-term Qatari contracts are giving higher weight to natgas trading hub prices. We remain long the XOP ETF to retain exposure to fossil-fuel producers supplying DM and EM economies with natgas beyond the 2050 net-zero-emissions goals advanced by the IEA.
Volatility will remain the key dynamic in oil markets in the aftermath of the surprise Hamas attacks against Israel on October 7. The risk of a major oil supply shock has gone up, but meanwhile supply constraints will remain at variance with global growth problems stemming from restrictive monetary policy over the next 12 months. Favor bonds over stocks, large caps over small caps, defense and energy stocks over other cyclicals, and US equities relative to global equities.
The global energy transition will become more disorderly, if oil-and-gas capex growth continues to outpace that of critical minerals. We remain long exposure to the equities of oil and gas producers via the XOP ETF; the COMT ETF to retain direct commodity exposure, and $100/bbl December 2024 Brent calls. Slower supply growth of metals facing off against steadily increasing demand also favors exposure to metals miners and refiners via the XME ETF.