How to Play the Energy Spike

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The Strait of Hormuz is the single most important passage for oil in the world. According to the U.S. Energy Information Administration (EIA), about 20% of daily global oil supply transits this narrow passage between Iran and Oman.

When Israel and the U.S. attacked Iran on February 28^th, we knew there would be a response. Iran wasn’t going to sit idly by again. Military strategists knew what soft targets were vulnerable. And the Strait was an obvious target.

The best way for Iran to put pressure on the world was to cut oil supply.

Iran effectively closed the Strait, cutting off more than 20 million barrels per day. And while traders make bets on oil, the real trade is something else…

The Iranian military did far more than just close the Strait of Hormuz. They attacked key energy targets across the Middle East. It attacked energy infrastructure across the Gulf Cooperation Council states (Saudi Arabia, Qatar, UAE, Kuwait, Bahrain, and Oman).

Iran’s targeting of oil transport proved effective. Iraq reported shutting down 75% of its production due to a lack of storage. You can’t pump oil if you can’t move it or store it. That’s 3 million barrels per day, shut in.

More importantly, it isn’t just oil. QatarEnergy, a major global natural gas supplier, shut down its LNG production after Iran hit power plants and other critical infrastructure. The result was a massive spike in natural gas prices in Europe, which relies heavily on imports.

Goldman Sachs warned that if this lasts a month, it will send natural gas prices up to $85.80 per megawatt hour (about $25 per thousand cubic feet (MCF)). That’s the level that triggered a huge problem in 2022. Natural gas prices peaked at $400 per megawatt hour, due to limited supply. That’s equivalent to a U.S. natural gas price of $115 per MCF.

In 2022, Russia used Europe’s dependence on natural gas to pummel the west. That led to Europe moving away from Russian gas. Europe cut its imports from 45% in 2021 to 20% today. They replaced Russian gas with several other sources including imports from the U.S.

Interesting to note that U.S. natural gas prices are not responding to that yet:

About 12% of U.S. natural gas supply goes to LNG exports. This will be an excellent trade, particularly if the war lasts longer than a month. Here’s how U.S. natural gas prices performed in 2022:

There are several simple ways to speculate on natural gas prices. The U.S. Natural Gas Fund (NYSE: UNG) tracks the price of natural gas through futures. For those who want a little juice in the trade, there’s the ProShares Ultra Bloomberg Natural Gas Fund (NYSE: BOIL). BOIL provides a 2x leveraged return on natural gas futures prices.

The current situation in the Middle East is a disaster. It will become expensive at home, due to rising energy prices. Make sure your portfolio can offset some of that expense through smart positions. And today natural gas looks perfect for that.

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