In the midst of crazy market volatility like the last week, many investors look for higher ground and safer assets to move their money to.
Natural gas may be just that asset say analysts at Citi.
Natural gas typically does not correlate to the prices of the S&P 500, unlike other commodities like oil, says the report, and it can actually make gains while the market is falling.
“With what looks like higher levels of equity and oil market volatility on the horizon, the search for a more uncorrelated asset with potential upside amid market declines should garner more attention,” said the analysts. “US natural gas appears to have such properties, though understanding gas fundamentals is key to its effective use in investments.”
So as the market tumbles, natural gas should not simply fall along with it, but be priced based on underlying fundamentals.
Looking at the current natural gas market, Citi said that the fundamentals are strong enough that if the market and oil continue to decline that is actually a good thing for natural gas.
“Ironically, the worse macro factors, oil prices, and financing conditions become, the more constructive it could be for gas prices,” the note said.
Citi cites 4 reasons for this, broadly speaking these all add up to slowdown in production and supply, and with natural gas’ resilient demand, higher prices and profit:
- “Lower oil prices should lead to a slowdown in oil production growth and associated gas production.”
- “Lower oil prices should also affect prices of natural gas liquids (NGLs), as many gas producers opted to drill at liquids-rich locations to capture better value offered by NGLs.”
- “Financing conditions tightening due to market turmoil and lower oil prices should reduce capital expenditure on drilling projects, which again should lead to a slowdown in production (growth) for oil, associated gas and gas (all else equal).”
- “Gas demand is primarily a function of weather conditions and relative pricing between gas and coal. Weak macroeconomic conditions have impacts on industrial and electricity demand but the effect is more than offset by weather and price effects.”
Between its lack of correlation and positive upside even in a downturn, Citi sees natural gas as a possible safe investment.
“In all, the low correlation of returns between gas and proxies for the broader market, such as the S&P500, potentially makes gas an oasis amid market turmoil.”