My Deep Dive Into Natural Gas And Where The Real Money Is

Introduction Natural gas has spent this year (so far) doing something that looks like a market failure. As almost everyone knows, oil is having one of its best runs in a decade, which is the result of improving cyclical growth (think about the ISM Manufacturing Index), but also about massive supply disruption due to the Iran War. Meanwhile, Henry Hub natural gas sits near $2.80 per MMBtu, while I am writing this. Just look at the price chart below. For bulls, this is depressing. Source: U.S. Energy Information Administration And that's not even the frustrating part. The really frustrating part is that all of this is happening while U.S. LNG exports are setting records, while data centers push American electricity demand to all-time highs, and while the U.S. Energy Information Administration keeps cutting its gas price forecast anyway. To give you a few numbers, in February, the EIA thought Henry Hub would average $4.31 in 2026. By August, that number was $3.44. Don't get me wrong. I am not rooting for higher prices, as I don't want to see the consumer get hit by energy inflation. That's why I am also one of the few people with energy exposure who doesn't want to see $100 oil. However, I'm bullish, and I have been for some time, purely based on fundamentals instead of what I want and think is best for consumers. This means the obvious question is whether the market has simply lost the plot on gas? I do not think it has. I think gas has priced every single one of those bullish headlines correctly, and understanding why is the most useful thing an energy investor can do right now. Hence, in this piece, I want to walk through why the oil rally is part of the reason gas is cheap, why every bullish gas catalyst you have heard about is a volume story instead of a price story, and why the number everybody quotes is the wrong number to be looking at. Then I will use four companies as proxies for the three ways I am expressing this, and give you the screening tests I run, so you can do the same work on names I do not cover here. So, as this means we have a lot on our plate today, I would say we dive right in! The Divergence That Isn't One thing you need to know and have probably noticed already is that oil and gas get lumped together constantly, and for investing purposes that is a huge mistake. Oil is a global, seaborne commodity. A tanker leaving the Persian Gulf can go almost anywhere, which means a threat to shipping in one strait reprices the barrel everywhere on earth within hours. That is exactly what has been happening. Goldman Sachs raised its Brent and WTI forecasts by $5 in early September and warned Brent could push above $120 in 2027 if Gulf output stays roughly 4 million barrels per day below prewar levels. North American natural gas does not work that way. It moves through pipelines. The pipes go where they go, and the gas in them is priced by weather, storage, and whatever capacity happens to be available that week. But here is the part almost nobody says out loud. The oil rally is actively hurting natural gas. Most Permian gas is what the industry calls "associated gas" (gas that comes up out of the ground alongside crude oil, whether the operator wants it or not). Nobody in West Texas drills a well hoping for methane, as they drill for oil. The gas arrives as a byproduct, and because the oil already paid for the well, that operator will sell the gas at almost any price. And as the Permian is getting "gassier" due to the decline in reserve quality, we see that since 2021, natural gas production has risen by 60%, way faster than the crude oil output, as the handy overview below shows us. Source: U.S. Energy Information Administration This means that when oil goes to $104 (or any high number), Permian operators drill more. And when Permian operators drill more, the U.S. gets more gas that nobody asked for. The EIA expects Permian gas production to average about 29.2 Bcf/d in