“Winter is coming”: Hedge fund bear Russell Clark bets on gas price surge

gas pipeline

The price of natural gas is predicted to surge amid stalling US production levels, says Russell Clark Investment Management, London-based global equities hedge fund.

Russell Clark’s contrarian long/short firm, which is well-known for its bearish calls in global stock markets, is betting on natural gas prices to spike as a result of tightening supply heading into the winter months.

Earlier this year, Clark suggested future rises in the cost of natural gas following the oil price crash could squeeze utilities’ profits - with US companies proving a lucrative short bet for hedge funds.

Now, the long-running firm – which was previously known as Horseman Capital Management before rebranding in May this year – believes that current sliding production levels, coupled with further falls in the future, will send prices soaring.

“Winter is coming, and so are higher natural gas prices,” Clark said in a market commentary on Monday (13 July).

He observed how fracking’s rise in recent years had sparked a boom US natural gas production levels, causing natural gas prices to fall dramatically and dampen seasonal volatility, Clark noted. 

“As US domestic natural gas production has grown, demand from the electricity sector has also grown. Consumption has doubled in the last 20 years,” he said.

As a result of this lower gas price volatility, producers have eschewed increasing storage capacity.

But with a halt in production growth - particularly the Appalachian region, “the key gas basin” according to Clark – the US faces a “sizable legacy decline that is hard for new production to overcome,” Clark said.

Production is now around 2 billion cubic feet below peak production, with further falls potentially round the corner, he added.

“Small declines in production can have an outsized effect on supply in the peak winter season,” Clark said, noting how natural gas prices surged from USD2.8 to USD5 in December 2018.

“Worldwide natural gas prices tend to be more volatile when peak storage is around 3500 billion cubic feet, compared to a peak of 4000 bcf. Over a full year of production, this implies only a daily fall of 1.5 bcf is needed to tighten the market. Appalachia production has already fallen by this much.”