Natural Gas

China’s reopening faltered and now it is applying moderate stimulus. OPEC 2.0’s production discipline is getting results, with oil prices climbing. The Fed will not be able to deliver dovish surprises in Q4 2023. Investors should expect stock market and commodity volatility and prefer defensive positioning.

The geopolitical backdrop remains negative despite some marginally less negative news. China’s stimulus is not yet large or fast enough to prevent a market riot. Two of our preferred equity regions, ASEAN and Europe, are struggling to outperform. Investors should stay defensive overall.

Positive economic surprises have delayed the onset of recession in the United States. But tighter monetary and fiscal policy, slowing global growth, and a looming rebound in policy uncertainty and geopolitical risk suggest that investors should buy insurance while it is cheap.

The attempted coup in Russia produced subdued short-covering rallies in oil, gas, and grains markets, as markets over time have observed that coups, rarely result in loss of production and exports. Markets await Putin’s next move. Unless and until a viable threat to the Putin government emerges, markets will continue pricing in fundamentals prevailing prior to Saturday’s attempted coup. We are keeping our base case brent and henry hub natgas price expectations unchanged.

We are strategically bullish on the outlook of the energy sector. Domestic and external political constraints asserted themselves, restraining the most negative impulse against this sector by the Biden administration. Go long energy versus cyclicals (ex-tech).

EUR/USD is trying to breach above 1.10. What is the balance of positive versus negative factors that would allow the euro to breakout?

Fertilizer prices will continue to move lower as the natgas price shock touched off by the Russian invasion of Ukraine dissipates. As a result, we expect grain prices to soften another 10% this year. Food-price inflation will move lower over the course of the year as grain prices weaken, provided a weather- or geopolitical shock does not once again send natgas prices higher.

China’s appetite for liquefied natural gas (LNG) is set to rise this year, spurred on by collapsing international LNG prices and a moderate recovery in domestic demand. Global LNG prices will face upward pressure on recovering worldwide demand and a limited supply increase in the second half of the year. We expect LNG prices in China and globally to be 20-30% higher than current levels by the end of this year.

Stay defensive in the second quarter. We can see a narrow window for risky assets to outperform but we recommend investors stay wary amid high rates, supply risks, extreme uncertainty, peak polarization, and structurally rising geopolitical risk.