The advent of negative prices for the US West Texas Intermediate (WTI) oil benchmark will further squeeze growth and investment in the Permian basin, potentially heralding a sharp slide in US natural gas exports, according to Horseman Capital Management.
The London-based contrarian long/short hedge fund firm led by Russell Clark believes US exports of liquefied natural gas are likely to fall, “potentially precipitously”, in the current trading environment – a knock-on effect of lower US oil production.
“If I was a US LNG exporter, I would listen to the Noel Gallagher song ‘Gas Panic’,” Clark said in a note on Wednesday, citing the lyrics to the 2000 Oasis single. “Yer better get on yer knees and pray/Panic is on the way.”
Clark – whose bearish Horseman Global strategy has reportedly gained some 22 per cent year-to-date as markets have slumped – observed how natural gas price movements in the US have often foreshadowed those of the oil sector.
The shale revolution turned the US into an energy exporter, he noted, most notably in gas extractions from the Permian, the predominantly oil-focused basin in the US south-west. As long as Permian oil production was growing, US natural gas prices would be expected to remain low, he explained.
“Permian producers care much more about oil production, and gas was a by-product. This led natural gas prices in the Permian to trade below zero in 2019, again foreshadowing the weak oil prices we have seen so far in 2020.”
Last month, futures prices in the West Texas Intermediate (WTI) benchmark slipped into negative territory – at -USD37 a barrel – for the first time ever, while Brent crude dropped to below USD20 amid concerns surrounding overproduction.
Several oil-focused hedge fund strategies capitalised on the dislocation, generating double-digit returns.
Clark said that with January 2021 natural gas futures prices set at USD3, and transportation costs of liquefied natural gas at some USD3 a unit, “unless Asian LNG prices rise substantially then US exports of LNG are likely to fall, and potentially precipitously.”
The CEO added: “Currently LNG exports are around 7 per cent of US production, so the implication of rising future natural gas prices is a market expectation of a huge fall in US natural gas production.”
Until this year’s stellar gains amid the market downturn, Horseman had struggled to reconcile its consistently negative market outlook with the global equities surge, with the Horseman Global strategy losing 35 per cent during a torrid 2019.
