Expect $4 Gas Sooner Rather Than Later, Morse Says
Summary
- The current Middle East conflict is the most serious disruption to energy markets since the early 1970s, with the Strait of Hormuz closed and up to 16-20 million barrels per day of oil at risk.
- Natural gas markets are facing a severe shock, with 20% of internationally derived natural gas (from UAE and Qatar) shut off for at least a month.
- Refined product prices (gasoline, diesel, jet fuel) are rising faster than underlying crude due to a 2 million barrel-per-day curtailment of Middle Eastern product exports.
- The US is uniquely positioned with incremental crude capacity, causing WTI demand to skyrocket and close the historical price gap with Brent crude.
- Strategic Petroleum Reserve (SPR) releases by the G7 (estimated at 300-400 million barrels) will likely fail to cap prices long-term due to the physical logistics of redeploying oil amid sanctioned/blocked paths.
- Geopolitical vulnerability is forcing major economies (China, Europe, India) to aggressively accelerate their transition to clean/green energy to reduce dependence on Middle Eastern fossil fuels.
Trade Ideas
"China is energy dominant when you think of clean energy. And they have certainly decided as being very dependent on flows, particularly from the Middle East, that they're going to double down on the clean energy scenario. Europe is already talking about going back to green energy targets." The closure of the Strait of Hormuz acts as a massive wake-up call for energy-importing nations. To eliminate the existential economic threat of Middle East supply shocks, global superpowers will aggressively accelerate state-backed capital expenditure into domestic solar, wind, and clean tech infrastructure. LONG Clean Energy ETFs (ICLN / TAN) as a structural, geopolitical hedge against fossil fuel dependence. Higher interest rates making capital-intensive renewable projects unprofitable, or a change in political administrations that slashes green energy subsidies.
"Gas prices have skyrocketed around the world because 20% of the world's available internationally derived natural gas comes from the UAE a little bit and Qatar an awful lot. And that's not going to be turned on for at least a month." The sudden removal of one-fifth of the global seaborne natural gas supply creates an immediate, massive supply deficit. This forces global buyers (especially in Europe and Asia) into a bidding war to secure alternative supplies, which will aggressively drive up the price of US natural gas exports and the underlying commodity. LONG UNG to play the severe, immediate supply shock in the global natural gas market. Warmer-than-expected global weather reducing heating demand, or alternative pipeline supplies ramping up faster than anticipated.
"We're seeing a curtailment on the product side. The Middle East... 2 million of that is product. And we've seen that product which largely goes into Asia having a dramatic impact on jet fuel prices in Asia, on gasoline prices in Asia, on diesel... That's much more than the 15% increase we've seen in the US." Because refined products from the Middle East are blocked, global product markets are tightening even faster than crude oil markets. US refiners are uniquely positioned to benefit from this dynamic. They have access to domestic crude and will see their crack spreads (profit margins) explode as they export refined products to fill the global void. LONG US Refiners (VLO / MPC / PSX) to capitalize on widening crack spreads and global refined product shortages. Government intervention (e.g., US export bans on refined products to keep domestic pump prices low) or a severe global recession destroying demand for jet fuel and diesel.
"We have the Houthis and they have not activated yet... it can go to the full 20 [million barrels] coming out of the Middle East if we have a closure on the other side of the Arabian Peninsula... The release [of strategic stocks] will obviously cause the market to fall, but how long that'll last is another matter." The market is currently underpricing the duration and severity of the supply shock. Futures backwardation is a reflection of low liquidity, not a quick resolution. A physical supply disruption of this magnitude cannot be sustainably offset by SPR releases, meaning crude prices will remain structurally elevated as the conflict drags on. LONG USO to capture the sustained geopolitical premium and physical tightening in global crude markets. A sudden diplomatic resolution or regime change that immediately reopens the Strait of Hormuz, or a massive, coordinated global SPR release that overwhelms near-term demand.
