The news cycle is focused on the higher-than-expected Consumer Price Index (CPI) reading and the likelihood that the Federal Reserve will raise interest rates by another 75 basis points — or perhaps even higher — at its upcoming meeting.

Meanwhile, summer is in full swing, and U.S. natural gas prices are tame compared to those in Europe.

But there is a quiet storm developing in the natural gas sector. The situation in Europe is setting the stage for what could be a significant rise in the price of the commodity around the world as winter approaches.

That’s because, among other things, geopolitical brinksmanship threatens to create a natural gas supply crisis that could cripple the German economy, with negative repercussions throughout the financial markets and the global economy.

Mark Your Calendar

July 22, 2022, is a key date for the global financial markets. That’s the day Russia is supposed to turn Germany’s gas supply back on.

Yes, you read that correctly.

On July 11, Russia turned off a key part of the Nord Stream 1 natural gas pipeline for “scheduled repairs.” The pipeline supplies a vast portion of Germany’s natural gas supply.

Meanwhile, German industrial giant Siemens has been repairing a key set of Russian pipeline turbines at a facility in Canada. Thanks to the war in Ukraine, Canadian sanctions had forbid the return of the turbines. But Russia said it couldn’t turn the pipeline back on without them.

Now, after some deliberation, Canada has carved out an exception to the sanctions and has agreed to return the turbines. Ukraine is suing Canada for breaching its sanctions and is urging Europe to switch to Ukraine-based pipelines.

Finally, Wall Street banks are circulating reports that French government officials are expecting the Russians not to turn the pipeline back on on July 22, even if they have the turbines and the Nord Stream 1 is operational.

If that happens, Europe could find itself without enough natural gas for the winter.

A Hemispheric Disconnect in Prices

Natural gas prices in Europe are climbing as fears of a complete cutoff in Russian supplies rise. Meanwhile, in the U.S., prices have been heading lower, although it looks like a price bottom could be developing.

The stark contrast in prices is evident when the price chart for Euro natural gas (above) is compared to that of spot prices in the U.S. (below).

At least, there is a partial explanation.

There have been several explosions at key natural gas processing plants in the Southwestern U.S. That may have impaired operations at these plants for months, further reducing the U.S.’s ability to ship liquified natural gas (LNG) to Germany.

Ironically, these explosions have increased the amount of natural gas available for U.S. consumption. In turn, that has kept domestic prices down.

Read This Story: The Global Energy Trends You Need to Know

Perhaps what stands out the most in the U.S. natural gas price chart is the continuing decline of the accumulation/distribution (A/D) indicator, which is a sign that short sellers are in charge. I would expect prices to remain near current levels until there is a supply-related issue that changes the supply/demand equation.

It’s All About Supply

In a recent article, my colleague John Persinos highlighted the crucial yet often-ignored role that the supply of commodities — oil, in particular — plays in price-setting.

John correctly pointed out that, regardless of what the media says, rising crude oil supply will always cause a drop in prices. It’s a similar situation with natural gas.

													Historical Comparisons
Stocks billion cubic feet (Bcf)													Year ago (07/01/21)						5-year average (2017-21)
Region	07/01/22			06/24/22			net change			implied flow				Bcf			% change			Bcf			% change
East	482			461			21			21				520			-7.3			548			-12.0
Midwest	562			535			27			27				636			-11.6			627			-10.4
Mountain	138			134			4			4				176			-21.6			164			-15.9
Pacific	240			235			5			5				246			-2.4			272			-11.8
South Central	890			886			4			4				993			-10.4			1,023			-13.0
Salt	233			242			-9			-9				287			-18.8			297			-21.5
Nonsalt	657			644			13			13				706			-6.9			726			-9.5
Total	2,311			2,251			60			60				2,572			-10.1			2,633			-12.2
Totals may not equal sum of components because of independent rounding.

Source: U.S. Energy Information Administration

The table above shows that, while natural gas stocks in the U.S. rose in early July, they remain below both last year’s levels and the five-year average. This means that the data we see over the next few weeks will be crucial, because it will forecast the amount of natural gas available for winter in the U.S.

Looking Ahead

Here’s where it gets interesting and potentially dangerous.

If Russia does not turn on the spigots to Europe as scheduled, the demand for liquified natural gas from the U.S. and other sources, such as Australia, will increase.

That will decrease the supply available for domestic consumption, even once the offline LNG terminals in the Gulf and the Southwestern U.S. are operational.

On the other hand, if U.S. supplies remain relatively tight, as Energy Information Agency data indicates, the increased demand from Europe — and the eventual increase in demand for winter heating in the U.S. — could quickly send the currently tame natural gas prices in the U.S. significantly higher.

All of this brings me to leading U.S. liquified natural gas processor, Cheniere Energy (NYSE: LNG). Cheniere’s stock price has remained very stable in comparison to the price of natural gas.

Cheniere may be in the driver’s seat at the moment, but its finances are a bit hazy, for sure.

The company lost money in the first quarter of 2022, despite rising EBITDA (earnings before interest, taxes, depreciation, and amortization). The loss was due to bad hedging bets and derivative transactions that cost the company $3.5 billion.

Without the bad bets, it’s clear that business is booming. The company reported $6.7 billion in liquidity, including $2.7 billion in cash.

Cheniere’s recent earnings report is chock-full of upbeat milestones and future expansion plans fueled by U.S. government-spurred allowances to increase production.

Price Chart Analysis

Shares of Cheniere Energy have held up much better than the price of natural gas, despite the huge loss based on bad derivative bets.

The market has decided that the supply-and-demand scenario for liquified natural gas overshadows Cheniere’s derivative disaster. That says a whole lot.

Moreover, the internal money flow indicators are supportive. For example, the accumulation/distribution indicator is holding steady. Every time it dips — a sign that short sellers are trying to bring the stock down — it bounces back up.

And on-balance volume (OBV) is showing a similar pattern. This means, when the shorts try to hit the stock, buyers step in.

Volume by price (VBP) — in the chart above, the three big bars on the left — corresponds to the current trading range. Currently, this metric indicates that there is a battle between the short sellers and the buyers between $125 and $145.

What Could Possibly Go Wrong?

Inflation, crude oil, and gasoline prices are grabbing the headlines. Yet natural gas is perhaps a more important benchmark to monitor in the energy sector.

That’s because Europe — especially industrial powerhouse Germany — depends on Russian natural gas supplies. And these supplies may or may not return to normal levels as winter approaches.

This could lead to a global decrease in the supply of the fuel and create widespread economic upheaval.

Meanwhile, U.S. supplies, although improving, remain below historical levels. This means that any type of global supply squeeze could well affect U.S. natural gas prices this winter. And the negative effects would likely spill into the economy.

Finally, Cheniere Energy’s stock is close to a potential price breakout, despite management’s bad hedging decisions. This tells us the smart money is betting that, even without an A-team in the C-suite, LNG’s business is so good at the moment that the risk/benefit ratio is overwhelmingly positive.

Of course, many things can happen between now and the onset of winter. But clearly, there is a whole lot going on in natural gas. And it’s possible that the current price of the commodity is very undervalued.

So mark your calendar. Everything could change drastically on July 22, 2022.

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