March 2023
This winter has been colder than usual in California, causing the demand for natural gas to increase. California gets most of its natural gas from other states like Texas, and supplies have been constrained there due to pipeline maintenance. High demand and low supply generally cause prices to skyrocket.
Will prices continue to increase? Sasan expects energy prices to swell going forward as China opens up and uses more energy. There have also been less investments in new rigs for oil and gas, causing decreased capital expenditure and limited supply. Heightened prices may not be exclusive to natural gas, as Sasan says inflation in general will continue to climb due to deglobalization and the transition from traditional to renewable energy. There will be more demand for industrial metals than before, leading to higher commodity prices and an inflationary regime.
To invest against this environment of high inflation, Sasan advises investors to consider focusing on private credit with floating interest rates and natural resources/industrial metals.
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Hello, everybody, and thank you for joining us for a new episode of THE FINANCIAL COMMUTE. I'm Chris Galeski, your host, joined by Managing Director of Investments Sasan Faiz. Sasan, thank you for joining us.
Thanks for inviting me.
We're going to talk today about natural gas prices, inflation and why Californians are potentially getting hit so hard with prices of natural gas. But also just sort of the theme of energy, you know, across the globe. Sure.
In general. Yeah. Maybe I can start with a little bit of a macro backdrop. So obviously, last year with the invasion of Russia of Ukraine, we had this spike in oil prices over $120 and gas prices also went up to over $9. And everybody was expecting a very cold winter in Europe and the US. So what we've had is actually the opposite.
Not taking into account the storms we are having both in California and the rest of the U.S., the past week or so, it's been a fairly mild winter in the U.S. and also also in Europe. And Europe has been disconnecting somewhat from Russian gas. So gas prices started coming down because the big picture did not support higher gas prices.
There was not as much demand. This story in California is a little bit different. And obviously we've had a much colder winter. Yeah, and the two utilities in California, in Southern California, Southern California Gas and San Diego Gas and Electric have to buy natural gas. That's coming mainly from West Texas where the supplies have been constrained.
Yeah, I felt like that that was sort of interesting. And I think that's the part that's hard to grasp because many, many of us homeowners, renters or even business owners that rely on natural gas to keep us warm or operate our businesses. We were caught a little bit by surprise about this, the sticker shock. I think we were warned, hey prices might be higher, but in some cases they were three, four or even 500% higher for some people.
And it's somewhat of a perfect storm, from my understanding. You know, California gets 90% of its natural gas from outside of the state. And there's a number of things that happen.
Exactly. Yeah. I think as you mentioned, I think that the power that we get from northeast, was also Oregon and Washington were experiencing more of a drier, colder weather. So not as much hydrothermal energy was transferred to California and also the supply that we get from West Texas as well, also constrained. So that really led to much higher prices.
Well, for a second, it was constrained because a bunch of those pipelines were actually shut down for maintenance. There was a fire on one of them. There was some maintenance. And so as we talk about some of the reasons why California's experiencing, you know, higher natural gas prices, it's just sort of a perfect storm of events. We got less energy from Washington.
There were pipelines constraints coming from West Texas. California was really cold. So we needed more of a demand. And even one of the largest places that California or the Western United States gets access to natural gas, which is actually Aliso Canyon. We are accessing less natural gas from that site because they discovered a major leak in 2015.
And so we've become less reliant on that over the last few years. So California doesn't have the stores that they used to.
Yeah, I think those are I think another reason why we also pay higher gas prices than the rest of the country as well. Again, is a lot of supply demand dynamics that are unique to California. But I think the big picture, if you're looking at the big picture, natural gas prices are down to about $2.80 per million BTU right now.
And about last year, they were around $0.85, and then the peak?
It went over $9 after the Ukraine invasion. And I think the market right now is expecting, you look at the futures market, what the market is expecting their prices to be. It's going to kind of trend higher, to around $4. That's what it's priced in right now. Our thesis at Morton Wealth is that we're expecting higher energy prices.
The main reason for that, both oil and gas, is we've had this pullback mainly a little bit more due to global growth slowing down. But there is also less investments in new rigs for both oil and gas. So capital expenditures have been very constrained. So companies are not spending as much. So that's going to lead to a limited supply going forward and limited supply is going to just lead to higher prices.
So our thesis is that energy prices are going to be higher going forward, especially as China is reopening. I think that's going to be a huge consumer of energy and we think that's just going to bring a higher energy price and higher inflationary regime going forward than what you've had in the past ten years or so.
And I think that that's where it's challenging when we're thinking about ourselves or the economy, higher inflation. The Fed's trying to do what they can by raising interest rates to combat inflation. Some of this is completely out of their control in terms of, you know, having a colder winter, lack of supply and a need for more and some closures due to maintenance or fires like there's nothing to do with interest rates.
Oh, absolutely. I think the Fed is basically trying to suppress demand by raising interest rates. They're trying to slow the economy down. They're trying to raise unemployment, even though that's not what everybody talks about. But that's one way of slowing things down. But I think there are basically two big factors that are driving higher inflation going forward.
And they've been in play for almost four or five years. One is the concept of deglobalization bringing manufacturing in-house. So we are spending a lot of money right now building semiconductor plants in Ohio and Arizona. So that's obviously going to lead to higher prices for semiconductor chips going forward than if they were going to be made in Southeast Asia.
So that's one factor. The other factor is this transition that we're seeing from traditional energy sources to renewable energy sources. Renewable energy sources, everybody sees so many electric cars and hybrid cars now on the road. They are very, the battery manufacturing process is very intensive in industrial metals. So there's going to be a lot more demand for industrial metals like lithium, cobalt, nickel, zinc than they were before.
So this is also going to lead to a higher commodity prices and also higher inflation regime going forward. That's why we believe, regardless of what the Fed does with interest rates, that we are going to be in a higher inflation regime. Nobody knows what that's going to be, but high inflation regime versus what we've had in the past 10 to 15 years post GFC.
Yeah. And so besides investing, I mean, the best way for people to potentially protect themselves from this current situation that we’re in with higher natural gas prices, so heating or running a business that requires natural gas is more expensive, we should, I guess, expect some higher prices from some of those restaurants that require natural gas to cook our food because they need to cover that cost.
But if we're worried about natural gas prices at home, we may want to look into heaters that we can plug into the wall and use electricity as opposed to being reliant on natural gas to heat our whole home.
Yeah, I think those are some great suggestions and hopefully we're going to have a little bit of a nicer weather in California going forward. So maybe you won’t have to use as much natural gas.
You know, they did say that, you know, prices are starting to come down. And so hopefully we'll be able to see that reflected in our bill. And I know that there's a lot of small business owners that are petitioning California for some relief because, you know, you have some restaurants that are typically used to spending $1000 or $1500 a month for natural gas to operate their business and their bills skyrocketed north of $6000 or $7000, in some cases, that could be unsustainable. When it comes to investing in trying to combat against inflation and looking for growth, there's a number of different ways to do it. How do you recommend investors sort of hedge their portfolio or their investments in a way to invest against higher inflation in the future?
So I think there are a few ways to kind of go about it in the credit space, in the fixed income credit space, we like to be focusing more on private credit, which is more floating rate. So as interest rates have gone up, these private loans have also continuously stepped up in interest rates. So we've stayed up with interest rates rather than being invested in the public fixed income space, which is mostly fixed interest rate.
And the other area that we at Morton Wealth, I think we're fairly positive on is the commodities and natural resource sectors because we think that they're going to be prime beneficiaries of this trend of higher inflation and the deglobalization and decarbonization that I talked about. And the best way to really capture that theme is through natural resources.
Yeah. Sasan, thank you so much. And as we mentioned today, obviously, natural gas prices really hurting consumers and people here in California in their pocketbook because it's expensive to heat our homes or even, you know, just to operate our business. But hopefully there's some relief coming down or prices coming down as this perfect storm that sort of came together caused prices to jump so high. And Sasan, thank you for also giving us some ideas on how to invest.
Thanks for inviting me, always happy to be here.
Disclosure: Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your financial, legal, and tax professionals before implementing any transactions and/or strategies concerning your finances.
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