Gas has been cheating on oil with renewable energy. Now comes the “decoupling”, if you want to be polite about it.

Once again, yesterday’s Exponential Investor didn’t age well.

I asked whether the oil slam would extend to the June contract now that the May contract had expired. And, by the time you got the article, it already had…

Oil plunged again overnight. And the carnage even spread to Europe’s Brent oil too. We’re not negative, yet. But this tweet summed it up nicely:

Source: Javier Blas, on Twitter

But here’s the odd thing. Oil stocks are not just holding up. They’re doing just fine. That’s what The Fleet Street Letter Wealth Builder’s Charlie Morris told CNBC recently.

The oil price is down about 50% in a month. What would you expect oil stocks to be doing?

Well, Exxon Mobil was up almost 30% over the same timeframe. The SPDR S&P Oil & Gas Exploration & Production ETF up 43%. You get the idea.

This is of course just the latest leg down in oil. Oil stocks took a beating alongside everything else going back more than a month. Remember, the oil crash preceded the Covid-19 chaos.

But oil stocks’ immunity to the recent oil price chaos is astounding. It’s as if the current crash doesn’t count. Investors continue to assume the contango in the oil market will come to pass – future oil prices will rise to where the futures market currently expects. Even yesterday’s plunge didn’t dissuade anyone, much.

Let’s drop oil for today though. I’m sick of my articles discussing whether what’s in the news by the time you read it might indeed happen.

Let’s discuss what should be the collateral damage of the oil price panic. Because it isn’t, so far.

The natural gas price is supposed to be tied to the oil price very closely. But it hasn’t been lately.

Let’s get some context first. The gas glut preceded the oil price glut. Gas prices have been incredibly low for a long time now.

And, here’s the interesting bit, gas has actually been rallying during oil’s recent plunges.

I asked our energy experts James Allen and Kit Winder why.

Kit responded first:

As oil rigs shut down amidst the slump, less gas is being produced as a by-product and so supply is thinning. And gas is used in electricity generation more, so it hasn’t seen such a slump in demand.

James agreed and added something interesting:

That’s right. If oil rigs shut in, that will reduce associated natural gas production.

But it’s interesting that natural gas traders are taking this view whilst oil traders are still selling off oil futures contracts.

But natural gas has been slumping for ages now so traders have probably been eagerly awaiting any signs of production curtailments.

There you go. An oil glut leads to a gas shortage. James wasn’t impressed with this over-simplification when I put that to him though: “Sort of, though there’s definitely no shortage of gas. The market is oversupplied too. Prices are still at multi-year lows.”

But oil and gas have been moving in opposite directions during the recent oil plunge. That could be signalling a decoupling. Natural Gas Intel reported on how it played out:

… natural gas traders on Monday took their cue from unparalleled deterioration in the oil markets. After an initial sell-off early in the session, the May Nymex gas futures contract rallied, shattering resistance and settling the day at $1.924, up 17.1 cents from Friday’s close. June climbed 14.6 cents to $2.049.

That’s extraordinary. Natural gas up, while oil hits lows only considered theoretically possible, if that.

Is this the end of the relationship between oil and gas? Are they getting divorced?

The oil price plunge is not the only reason oil and gas could move apart. Gas has a new partner in power – renewable energy.

Gas power plants are nice and fast to get online. They pollute less than other fossil fuels too. This means they’re often used in partnership with renewable energy, to make that power more reliable.

With $55.5 billion invested in renewable energy in Trump’s America last year, an increase of 28% on the previous year, and a 74% boost in Jair Bolsonaro’s Brazil, even the sceptics are busy putting their money where their mouth isn’t.

A renewable energy boom is likely to lead to a gas boom too. It’s one of the few things climate change sceptics and enthusiasts can agree on.

In the future, Russian gas could be the key to Europe’s renewable energy future… Perhaps that’s why the Nord Stream pipeline was so important. It didn’t contradict green energy plans, but made them viable.

And all that natural gas might make renewable energy more viable than ever thanks to the cheaper prices.

But what is this renewable energy future I mention?

Well, that’s what James and Kit are figuring out right now. And they’ve invited some of the world’s top experts to help lay out their predictions.

Given the huge investment booms in oil and gas which UK investors could’ve taken advantage of, I think it’s time to focus on what’s coming next.

And this is the best place to find out what that is.

Nick Hubble
Editor, Southbank Investment Research

Category: Energy

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