Has The Extreme Bear Market in Natural Gas Come to an End?
Haley Zaremba

In the latest edition of the Numbers Report, we will take a look at some of the most interesting figures put out this week in the energy and metals sectors. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers. 

Let’s take a look. 

1. Beating Market Expectations, Tesla Sees Investors Believe Again

The 40% rebound in Tesla shares has eased concerns about the company’s future, seeing options investors at their most bullish in more than three years, believing there’s still an upside to the carmaker’s valuation.
 
- The Tesla rally intensified after the world’s second-largest EV carmaker reported a smaller annual decline in quarterly vehicle deliveries than was initially assumed. 

- According to Bloomberg data, the 3-month call skew gauging the premium of call options over puts, has turned positive again and has been trending around 2.75 points. 

- The past month’s Tesla rally has reportedly lost short sellers some $3.5 billion, with short interest in the company currently standing at 3.5% of float with a $22 billion notional value. 

2. Unprecedentedly Hot Summer Brings the Heat to US Gas Inventories

The US natural gas storage surplus to the 5-year average of inventories has declined for a seventh consecutive week, falling to 528 BCf at the end of June on the back of robust gas-fired power demand and production cuts. 

- The average value of US natural gas consumption coming from the power sector rose to 45.3 BCf per day by the end of June, a whopping 14% higher than the same period a year ago thanks to an exceptionally hot summer. 

- The launch of the Mountain Valley Pipeline on July 1 has led to a recovery in natural gas output across the Appalachian Basin, with production expected to jump to 35 BCf per day from the Marcellus and Utica shale plays.
 
- For six consecutive weeks already, hedge funds have been holding a net long position in Henry Hub futures, currently around 35,000 contracts, putting an end to extremely bearish market positioning in January-May. 

3. Ageing Power Grids Across Europe and Americas Bad News for AI Expansion

The investment frenzy to build infrastructure for generative AI data centres will test national power grid operators’ resilience, with Europe and North America needing to upgrade their ageing electricity systems.

- According to Goldman Sachs analysts, an average ChatGPT search consumes 10 times more power than a Google search, with the cost of building a data campus assessed at $10 million per MW of capacity. 

- Europe’s power grid is the oldest globally, averaging almost 50 years across the region, increasingly a liability in a world where geographic proximity to data centres and their reliability plays a key role in consumption. 

- Demand for conveniently located data centres is expected to heat up property prices, with demand for data centre space already exceeding supply in Europe's five largest markets (London, Paris, Frankfurt, Amsterdam and Dublin). 

4. China Launches Next Stage of Rare Earth Industry Consolidation

- Shares of Chinese rare earth producers have jumped this week after Beijing launched a regulatory overhaul of the mining sector that should alleviate pressure coming from high supplies. 

- According to China’s State Council, a new unified development plan will come into effect October 1, mandating that refineries would no longer be able to use imported ores above government-set quotas.
 
- Currently, imports (mostly from neighbouring Myanmar) account for some 25% of China’s rare earth needs and government control is supposed to increase margins of domestic producers.

- Seeking to live out Deng Xiaoping’s 1992 maxim that “the Middle East has oil, China has rare earths”, Beijing has sought to bring the industry under control, merging key producers and combating illegal mining. 

5. US Oil Exports to Europe Drop to Two-Year Low as WTI Strengthens

- US crude exports to Europe fell to a two-year low as the region’s refiners bought cheaper local and West African barrels, seeing outflows decline to 1.45 million b/d according to Kpler data.
 
- This marks a 14% month-over-month and 27% year-over-year decline, coming as the US benchmark WTI strengthened relative to the European benchmark Brent over May, curbing the profitability of cross-Atlantic trades.
 
- The Brent-WTI spread hit an 8-month low on May 30, at -$3.95 per barrel, after the US light sweet benchmark’s discount narrowed in 15 out of 23 trading sessions on general European weakness.
 
- Absent any large-scale hurricane impact, US crude flows to Europe should recover over the summer months as the drop in WTI inflows has supported the value of Brent, making arbitrage workable. 

6. Tin Stays Strong as Base Metals Rally Dissipates

- Most base metals have come off their May peaks when hedge funds surged into metal futures, depressed by high inventories and soft demand in China, with one notable exception – tin. 

- The tin futures contract as traded on LME is up by more than 30% since the beginning of this year, trading around $33,250 per metric tonne, just as tin stocks held in LME warehouses plunged 38% in the same period.
 
- In contrast to nickel, supplies of refined tin from Indonesia have been disrupted by a backlog in approving new licences whilst exports from Myanmar were curbed after militias took over tin mines in Wa State. 

- The positioning of hedge funds in tin contracts is the most bullish since LME started to publish its Commitments of Traders Report in 2018, holding a net length of 3,726 contracts at the close of last week. 

7. Resounding Labour Victory in UK Election Expedites Majors’ Exodus

The landslide victory of the Labour Party in the UK parliamentary elections, ending the 14-year rule of the Conservative Party, does not bode well for the future of North Sea production and exploration.
 
- The new Prime Minister Keir Starmer has consistently promised to end licensing in the North Sea should Labour win, concurrently increasing the crippling 75% windfall tax by another 3 percentage points and extending its sunset clause until the end of the next parliament.

- UK oil production has been falling by an average 8-10% per year and out of the roughly 280 active oil and gas fields currently in the UK side of the North Sea, 180 will have ceased production by the end of this decade.
 
- US oil giant Chevron has sold its assets in the UK North Sea this May after 55 years in the country, simultaneously to ExxonMobil selling its stakes to a local upstream firm, and Labour’s win might prompt others to join the exodus. 

Haley Zaremba is a writer and journalist based in Mexico City. She has extensive experience writing and editing environmental features, travel pieces, local news in the Bay Area, and music/culture reviews.

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