world’s best investment bank Squid just issued an excellent note on shale gas. I posted on this a while ago and the story is certainly filling out.
A few points stood out: 1. Natural gas prices, in both absolute term and relative to oil, have tanked. I often hear people assuming they will go up. If something drops dramatically, the first thing people seem to think is that it will go back up, and now it a buying opportunity. That is true if it’s a cyclical case. If it’s secular, i.e. driven by factors that aren’t cyclical, then there is no reason for something that has gone down, to go back up. Similarly, something that has gone up, won’t necessarily go back down if the story has changed. You probably won’t be able to buy Apple for $100 ever again, for example.
2. There are some big winners. US, Australia, China and Argentina stand out.
3. US energy imports are falling drastically as expected, but fortunately China is there to pick up the slack or prices would fall. Actually this is quite unfortunate as we all would benefit from lower energy prices, while only a handful of
violent sexist extremist hoarders Western allies in the Middle East benefit when prices are high.
So how to play it? There are obviously some simple ways.. buying shale producers. But the easy money is certainly already made there.. not that you won’t still get decent returns on capital. The cost of sucking otu shale gas is so much cheaper than conventional drilling that the whole industry is likely to perform well.
My favourite pick? Buy US fertiliser producers. Natural gas is much lower in the US than elsewhere – one of the real anomalies in global finance right now. Natural gas is a key input, so US producers will have a huge advantage for a long time. And they are relatively cheap. Daniel Shand picked CF Industries, and I’m going to back him on this one.
Very volatile so a good candidate for selling puts, if current price seems a bit high.
Whilst on topic, has anyone noticed this? Doesn’t seem particularly bullish. Perhaps you could balance a long shale producers / short copper trade for a commodity neutral trade on this theme.