Charts of the Month - November '23

LNG – It’s That Important.

This month felt like LNG coverage month. Scott released his foundational European LNG Editorial a couple of weeks ago and we then followed it up with a long-form interview with Michael Kao (ex-Goldman commodities trader), covering in depth the editorial as well as a wide range of energy-related topics. Now, I’m adding a more U.S.-centric view with a few charts to contextualize further this topic we’re obviously serious about.

The U.S. began exporting LNG from the lower 48 states in February 2016, after a decade of growth in natural gas production as well as export facilities. Since then and up through the end of 1H23, the U.S. has become the largest LNG exporter in the world hitting 11.6 billion cubic feet per day (Bcf/d), surpassing both Australia (10.6 Bcf/d) and Qatar (10.4 Bcf/d).

As Scott explores in the above-referenced editorial, the EU and the UK were the primary destinations for U.S. LNG in 1H23, accounting for 67% (7.7 Bcf/d) of total exports. Per the EIA, “Five countries—the Netherlands, the UK, France, Spain, and Germany—imported more than one-half (6.0 Bcf/d) of total U.S. LNG exports.”

The good news, if you’re one of those five countries, or anywhere in the world other than the U.S., is that a vast amount of new U.S. LNG export capacity is coming online in relatively short order.

More than 12 Bcf/d will be coming online by 2027 (almost doubling current capacity), and another ~15 Bcf/d thereafter. These numbers are up to date as of last quarter.

This growing export capacity will be a significant source of U.S. gas demand.

And as Adam Rozencwajg said on our first Geopolitics of Commodities podcast “new natural gas supply always seems to find new demand”.

• Europe is the obvious destination and rightfully so, they’re continuing to wean themselves off non-geopolitically aligned sources of gas imports.

• Japan, the island nation with little natural resources of its own and the world’s #1 importer of LNG, will continue to be another huge source of demand, as LNG importers are being urged by the Japanese government to sign long-term (multi-decade) deals for fuel security.

This will lead to two fairly obvious outcomes:

• 1) Geopolitically speaking, Europe will lessen its dependence on Russian piped gas (again, be sure to read Scott’s editorial as it spells out the other chokepoints of European LNG, including the ongoing Armenia/Azerbaijan conflict), and

• 2) economically speaking, cheaper gas for Europeans as Dutch TTF natural gas prices (the European exchange for natural gas) will converge with Henry Hub natural gas prices (the American exchange for natural gas). For reference, as of Nov. 28th, the December ’23 Dutch TTF forward contract was priced at $14. The same contract for U.S. gas was $2.80.

The main driver of this huge price differential (besides the ongoing Russia/Ukraine war) is the engineering characteristics of natural gas.

• To move a gas around you either build pipelines (works for moving gas on the ground) or, for seaborne transport (think US to EU) you need to have infrastructure in place to cool the gas (-260F/161.5C) to liquefy it (turning natural gas into LNG), so that you can ship it around the world on LNG tankers, only to then re-gasify it at its destination port, and then pipe it to its final destination.

This is one reason why a commodity like oil, a liquid, has a smaller price differential for different grades traded globally. U.S.-based West Texas Intermediate is today trading at $75 a barrel, whereas Brent Crude of the North Sea, is currently $80 a barrel – only a 7% spread.

From a commercial perspective, this means U.S. LNG exporters are going to have increasingly more supply to send to a market accustomed to paying 5x more for the same commodity. To put it lightly, they are frothing at the mouth to get this additional capacity built.

Here at Lykeion, we don’t view natural gas as a bridge to our energy future, we view it as the future. Hard stop. It’s ~50% less pollutive than coal, abundant, safe, and low-tech (we love nuclear but recognize the engineering challenges of building reactors on a global scale – we’ll get there, but it’ll take time).

Soon, as more export facilities are built and as production leaders like the U.S., Australia, and Qatar continue to pull more out of the ground, prices will converge to a more globalized standard. Good for the world, great for U.S. natural gas companies (yes, I own a few), but a bit concerning for Americans who have become accustomed to an almost free, unobstructed supply of the good stuff.

A Counterintuitive View of Today’s Consumer

Typically, when we think of high-value demographics for advertisers, broadly speaking, the 25-55 year old cohort is the target age range (with additional demographic filters added for niche products), as that range is in the prime of their earning years and therefore, the prime of their spending power. The more money you make the higher your propensity to spend.

This chart is making me rethink a lot about what I thought I knew about consumers and consumption in general. We definitely need to take a deeper look at exactly what is being consumed by cohort, but from this view, my initial gut reaction was “retirees are swinging for the fences and spending all they’ve got”.

Boomers are currently aged between 57-75 years old, so they span two categories in this chart. The older group (the 65+ range), mostly done with their earnings years (unless you’re a U.S. politician that literally wants to die in office), could have built up such a large mass of wealth as a cohort, that for the first time ever, the biggest earners are not the biggest spenders, it’s the previous generation of accumulators. And that is a huge deviation from the norm.

I’m going to keep digging into this one and as we pull down more insights, you’ll find them in future publications. And if you have anything interesting for us to look at on this topic, send it over to [email protected].

Foreign Direct Investment

Foreign Direct Investment (FDI) is like external capex financing for nations.

We can look at FDI as a key leading indicator of economic development for the receiving country, and leads local wages, labor productivity, and can spur additional investment from local governments and businesses.

Such is the case with Apple and Foxconn now investing billions in India ($1.5 billion from Foxconn already and Apple stating its plans to spend $40 billion in India over the next 4-5 years) for production of the iPhone 14 and 15. It’s deals like these (along with thousands of others) that helped China pull an estimated 800 million people out of abject poverty since the 1970s.

Countries receiving a larger share of global FDI likely exhibit strong growth potential, a stable political environment including the rule of law, demographic tailwinds, and general economic and military alignment (or at least, countries that aren’t a military threat).

China has been the obvious winner of the last couple of decades since entering the WTO in 2001. FDI flooded the country with more than ~$4 trillion since 2005, and China usually screened as the second largest recipient of FDI every year, second only to the U.S.

But things have begun to slow down a bit.

This chart made some noise a few weeks back and rightfully so.

In this past quarter, China, the world’s trading partner, saw for the first time ever, net negative capital flows out of the country. I’d be speculating if I told you exactly why this is happening, but I presume it’s some combination of the geostrategic fallout post-COVID (countries looking to diversify supply chains away from one highly concentrated partner), the breakdown of relations with the U.S. (seen as a proxy for most of the West), and broad-based economic issues that have seen China struggling to recover from the pandemic after years of relentless growth.

But to be fair, in 2022 China still took down 12% of all global FDI, second only to the U.S and twice as much as the next largest recipient, Brazil.

A different view that should give you some food for thought, is FDI flows relative to GDP. Through this lens, China has been slowing for a while now, while other nations have been making some headway. I recognize the nominal numbers here are still vastly in China’s favor, but the trajectory is not.  

Corporations invest capex on long-duration assets knowing the return on those assets is sometime out in the future. For example, the average lead time of a new metal mine from discovery to production is 16 years and costs are typically in the billions. But the payoff of that investment is, at least hopefully, worth it in the long run.

FDI is no different, and if you want to look to the future for which countries will likely lead the global economy into the back half of this century, you don’t need to look too much further than this section (which we will be continuously updating as FDI is a key thematic we’ll be covering in our Research Editorials).

Semafor has recently become my go-to newsletter for all things business and finance.

They deliver exclusive Wall Street insights and is led by Liz Hoffman, who's covered these stories for decades. She’s one of the best-sourced reporters out there, and many senior executives already swear by her dispatches.

Highly recommend you sign up for the twice-weekly newsletter here.

P.S. If you recently signed up for the free newsletter tier (which today's publication is), you can try out our Members Content for free for a month by signing up at this link.

Members Content gives you access to everything we publish, including the 3-4 monthly Research Editorials, which includes the LNG piece we referenced in this publication. All the Research Editorials dig deeper with more insights into the key themes we cover here at Lykeion, the intersection of Markets & Geopolitics.

Give it a try and let us know what you think.

As always, we'll see you out there...

-Tim