Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Natural Gas Is the Odd Market Out This Summer
Transcript
- Lucas: Crude oil is sliding on Iran truce hopes, gold is basically flat above 4000, silver bouncing back, copper surging — but there is one commodity that is quietly getting crushed this summer, and it is natural gas. Luna: Yeah, Henry Hub futures are sitting around 3.26 as of this close. That is down more than 26 percent year-to-date. It is the worst performer in the energy complex by a wide margin. Lucas: And it is not just a year-to-date story. Look at the past five days alone — natural gas is down another 2.6 percent even as West Texas Intermediate crude is only off 2.6 percent over the same stretch, and that is with all the geopolitical noise around the Strait of Hormuz. Luna: So what is driving this? Because intuitively, summer should be peak demand for gas — air conditioning, power generation, all that. Lucas: Right, and that is what makes this interesting. Normally by late June, you see storage injections start to slow as cooling demand picks up. But this year, the injections have been massive. The Energy Information Administration reported another build above 80 billion cubic feet last week, and the market barely blinked. Luna: Eighty BCF in one week — that is a lot. Where is all that gas coming from? Lucas: Record production, plain and simple. The Permian Basin and the Haynesville Shale are both pumping at all-time highs. Dry gas output has been running above 105 billion cubic feet per day for most of the second quarter. And the thing is, associated gas from oil wells is still flowing even as crude prices dip because the oil rig count has not dropped meaningfully. Luna: So you have associated gas — gas that comes up as a byproduct of oil drilling — that the producers almost have to sell, regardless of price. Lucas: Exactly. And that creates a structural oversupply. The other piece is demand. We have had a relatively mild spring across most of the Lower 48. Not a lot of extreme heat events yet. So the power burn — the amount of gas burned to generate electricity — has been below the five-year average for this time of year. Luna: But it is only June. If we get a real heat wave in July or August, could that turn things around? Lucas: It could, and that is the bull case. But storage is already at 2.7 trillion cubic feet, which is 22 percent above the five-year average. You would need a sustained multi-week heat dome to eat into that surplus. And even then, you have record production capacity that can ramp up quickly. Luna: So the market is basically saying, 'Show me the demand.' And until we get it, prices are going to stay under pressure. Lucas: Right. And look at the futures curve — it is in contango. December 2026 futures are trading around 3.70, which is about 13 percent above the front month. That is the market pricing in a winter premium, but even that is down from where it was a few months ago. Luna: Contango means storage is economical — you can buy gas now, store it, and sell it later at a profit. That actually incentivizes more injections, which adds to the near-term glut. Lucas: Precisely. So the cure for low prices is low prices, but in natural gas, the cure takes a while because storage capacity is finite and production takes time to shut in. The producers that are really feeling the pain are the pure-play dry gas drillers in Appalachia and the Haynesville. Their break-even costs are around 2.50 to 3.00 per MMBtu. At 3.26, some of them are barely covering operating costs. Luna: And yet they keep drilling. Why? Because they have hedged a lot of their production from earlier in the year when prices were higher. Lucas: That is a huge part of it. The hedge book provides a floor for cash flows, so even if spot prices are weak, the revenue is locked in. But as those hedges roll off in the second half of the year, you could see producers start to cut rigs. We are already seeing some announcements — EQT, Chesapeake, they have talked about deferring completions. Luna: So the supply response could come, but with a lag. In the meantime, what does this mean for the broader energy trade? Because crude and gas are diverging. Lucas: They are. XLE, the energy sector ETF, is down about 0.6 percent over the past five days, but that masks a huge dispersion. The oil-heavy names like Exxon and Chevron are down — Chevron off 3.2 percent in the last five days alone. Meanwhile, the more gas-focused exploration and production companies, like those in the XOP index, are actually up 0.9 percent. So investors are rotating into gas names, betting on a rebound. Luna: That is interesting. So the market is pricing in a recovery in gas, even as the fundamentals look weak right now. Lucas: Exactly. It is a contrarian trade. If you believe that we will get a hot summer, or that LNG exports will pick up as new terminals come online, then buying gas at 3.26 might look smart in hindsight. But if the weather stays moderate and production remains elevated, you could see 2.80 before you see 3.50. Luna: And copper is doing the opposite — surging 3 percent in five days to 6.25. That is a commodity that is benefiting from a different narrative: energy transition, grid buildout, Chinese stimulus. Lucas: Right, and that is the key takeaway here. Commodities used to move together in a 'risk-on, risk-off' pattern. Now they are increasingly driven by idiosyncratic supply and demand stories. Natural gas is a story of domestic oversupply and mild weather. Copper is a story of structural demand growth and constrained mine supply. Gold is a story of central bank buying and inflation hedging. Luna: So for investors, it is less about 'commodities as an asset class' and more about picking your spots. Lucas: Exactly. And natural gas right now is one of the most interesting spots to watch, because it is cheap, unloved, and has a catalyst calendar ahead — summer heat, hurricane season, winter storage draws, LNG export ramps. Any one of those could flip the narrative. Luna: It feels like the kind of market where you need to stay nimble. And speaking of staying nimble, if you find these commodity breakdowns useful, it is worth noting that the show stays ad-free thanks to listener support. If walking through the economy with us has made something click, you can help keep it that way at buy me a coffee dot com slash fexingo. Lucas: Yeah, we really appreciate that. And it means we can keep digging into these specific stories without worrying about commercial breaks. So, back to natural gas — one datapoint I want to flag: the 10-year breakeven inflation rate ticked up to 2.22 percent on June 29, up from 2.20. That is still well within the Fed's comfort zone, but it suggests that energy prices are not the main driver of inflation expectations right now. Luna: Because natural gas is a major input for electricity and industrial production. If gas stays low, that actually helps keep overall inflation in check, all else equal. Lucas: Right. Lower gas prices flow through to lower electricity costs for factories, lower heating bills for homes, lower input costs for fertilizer and chemicals. So there is a silver lining to this glut — it is providing a disinflationary impulse at a time when the Fed is still trying to get core PCE back to 2 percent. Luna: Core PCE was 130.1 in May, up from 129.67. So still creeping higher, but the pace is slow. Lucas: Exactly. And if natural gas stays depressed through the second half of the year, that could help keep goods inflation in check. The risk, of course, is that if a hurricane hits the Gulf of Mexico or a polar vortex hits the Northeast, all bets are off. Luna: So the same factors that make it a dull market today are the ones that could make it explosive tomorrow. Lucas: That is the nature of commodities. The seeds of the next price spike are sown during the period of lowest prices. Producers cut back, demand eventually recovers, and then the market has to scramble. We are not there yet, but the setup is worth watching. Luna: Well, we will keep an eye on the storage reports and the weather maps. Thanks, Lucas. Lucas: Thanks, Luna. That is all for this episode of The Commodities Economy.