Everyone loves a white Christmas, right?
Careful what you wish for!
Many of us who grew up in the South remember the last time it snowed hard.
People were opening their front doors in southern states such as Virginia to a wall of white stuff! Literally snowed in.
Drivers in Atlanta and Raleigh were skidding off the roads. A big mess. Even Northern Florida saw flakes.
It got so bad so fast that year in North Carolina (2014) that one image continues to make the rounds online, dubbed “the snowpocalypse.”
Never mind the Northeast and the Plains states. They got it good and it lasted for months.
Of course, it feels like the winters have been getting warmer every year, right? Climate change, ugh.
Not to deny climate science, but other factors are in play. More routine changes in global weather systems come and go.
This year, the government’s weather forecasting agency, NOAA, is watching for a warmer, dryer winter in the northern U.S.
And, they say, a wetter winter in the southern part of the country.
Wet + cold = snow. Usually. Some of the mountain states, such as Colorado, have already gotten a taste of what’s to come.
Blame the El Niño weather pattern, the hallmark of which is a shift in how the jet stream from West to East moves across the country.
During an El Niño year, which scientists say has already begun, the winds from the Pacific Ocean dip farther south than usual.
That brings more rain and, if it’s cold enough, more ice and snow in the southern states.
The other thing an El Niño event can do is destabilize the winds that keep all that crazy cold polar air up at the top of the planet, the polar vortex.
Remember in February 2021, when Texas just about froze solid? Polar vortex.
According to NOAA scientists, here’s what happens.
A stable polar vortex acts like a belt, keeping the frigid Arctic air where it belongs, up the Arctic.
Once El Niño shows up, the “belt” can get wobbly and unreliable. Cold air flops all over the place like an out-of-control belly.
Much colder air spills down into populated areas, mainly into the central U.S. (and down into Texas) and across much of Europe. Brrr.
We’ve seen it over and over, which brings me to my investment idea this week, an energy market play with two ways to win.
If we get a really rough winter, gas prices could surge. They’ve been low for quite some time on massive supply (more on this to come).
But any unexpected disruption in supply, or an unexpected rise in demand, drives up prices fast.
People need to stay warm, heat food and light their homes. Here and in Europe, winter is at our doorsteps.
The other play is an income opportunity, uncovered by our own Charles Mizrahi. It makes great money even if gas prices don’t spike higher.
So what would have to “go wrong” for the natural gas price to shoot higher? There are two sides to that coin, as usual, demand and supply.
Demand-Up Scenario: Polar Vortex Returns
Betting on the weather is usually a sucker’s game. But take a look at the price of natural gas in recent years.
You see big spikes in 2001, 2003, 2006, 2014 and 2008.
2001 and 2003 were the result of higher demand after years of low investment in gas production.
2006 and 2008 were on hurricane activity that interfered with production in the Gulf of Mexico.
2014 was a polar vortex event.
Finally, the recent summer 2022 climb (red arrow) was a panic in Europe of winter supply constrained by the invasion of Ukraine by Russia.
The war is the war. But could we see another jump up on a colder-than-expected winter? Perhaps.
That would send gas demand much higher, pushing up the price.
Supply-Down Scenario: A Widening Global Conflict
Nobody wants to see anything remotely like more war happening, ever.
But sadly, we live in a time of difficult regional wars in both Europe and in the Middle East. And we are entering soon a U.S. presidential year, full of all the wild change that can bring.
Nobody knows what could go wrong, yet winter is coming just the same.
Much of Europe and Asia has come to rely on either Russian pipeline gas or U.S. liquified natural gas (LNG) exports sent on giant tanker ships to heat homes around the world through winter.
That’s right, U.S. energy.
In this chart, the blue is pipeline exports. The black is gas turned to liquid by chilling it and sending it abroad by ship.
It wouldn’t take much, some terrorists boarding a tanker at sea, a blocked port and the gas market would go nuts.
Did I mention there’s a war in the Middle East now, too?
Now imagine you get both of these scenarios, the demand-up scenario and supply-down scenario, at the same time.
It’s colder than normal here and in Europe, and natural gas supply can’t move by ship for whatever reason — war, labor strikes at ports, bad weather, you name it.
That would be a perfect storm for higher natural gas prices.
A Third Scenario: Nothing Goes Wrong at All
You have learned at least two interesting facts by reading this so far.
Fact #1: America leads the world in natural gas exports.
Fact #2: We lead today because we recognized the advantages of energy independence back in the early 2000s and made changes.
Fracking is the single biggest change the United States has made.
So much so that we became a net exporter of natural gas in 2018, for the first time since Eisenhower was president.
All that gas comes from shale, a type of rock that can trap natural gas. By forcing water into the rock at high levels of pressure, the rock breaks (“hydraulic fracturing” or “fracking”), releasing gas.
Fracking has its detractors, but it has absolutely achieved one important thing: It has made the U.S. dominant in the global gas market.
Sending LNG to Europe helped our allies thumb their noses at Russia’s Vladimir Putin, who thought that his pipelines into Europe would allow him to call the shots in Ukraine.
Sorry, Vladdy. It also lets us dictate, to a degree, how OPEC behaves toward us.
Homegrown natural gas keeps American homes warm in winter and is considered a “bridge” energy source toward renewables. Not as clean as solar or wind, perhaps, but far cleaner and greener energy than burning coal and oil.
We have a lot of it, and more is coming online soon. A lot of that marginal excess production will be exported, which means money for those invested in the infrastructure behind gas.
The huge amount of supply coming online, enough to export, makes investing in a short-run gas price surge speculative for sure.
I’d put this idea in the lower part of box two on our risk/reward chart — high reward but also relatively high risk.
You’d have to bet on gas prices going up (and later coming down) and perhaps use leverage to make the gains worthwhile.
Generally, the risk one takes with leveraged products rarely works out, unless you have specific experience in the field or a long track record of success in, say, options trading.
There are plenty of leveraged exchange-traded funds, for instance, in the energy market. But you run the risk of tracking error or simply poor timing.
That’s why I prefer to play natural gas in ways that make money in any market. For instance, you could buy a small-cap energy stock.
Charles Mizrahi was early on all of this, making a prescient call on a small-cap oil company as winter ended, back in March of this year, that has gained 22.58% so far.
The company benefits if gas prices rise, but it also wins if oil demand spikes. Given the issues in the Middle East, it’s amazing oil hasn’t already shot higher, as the World Bank expects it will, in time.
To see how you can unlock this small-cap oil play, click here.
Or you could choose an income investment based on gas infrastructure build-out. These companies finance natural gas pipelines, crucial to the business for both domestic use and exports.
They work like real estate investment trusts but around energy infrastructure. They’re income plays, but they’re also fantastic bottom-line boosters for retirees who need reliable cash flow, whatever the markets bring.
Charles got his readers into a few of these paying between 8% and 14%. To see more about his strategy, click here.
Aaron James
CEO, Banyan Hill, Money & Markets
P.S. Are you investing in oil? Let me know at AaronJames@BanyanHill.com.