Q3 2024 natural resources saw volatility: Natural gas inventories fell, oil faced a contrarian opportunity, coal stocks rebounded, precious metals surged, uranium saw supply concerns & agriculture/metal markets hinted at shifts. Read our in-depth analysis below.

The article below is an excerpt from our Q3 2024 commentary. 

Natural Gas

In the volatile world of U.S. natural gas, the past quarter unfolded with all the drama of a Shakespearean act. Prices began at a modest $2.60 per Mcf, buoyed by the quiet equilibrium of early spring. But by mid-June, the plot had transformed. An unseasonal heat wave gripping the central United States sent prices soaring to $3.15, a rally that spoke as much to the market’s sensitivity as it did to the hot weather. Yet, as quickly as the heat arrived, it receded. Milder temperatures reclaimed the stage and gas prices tumbled in response, bottoming at $1.90 by the end of August.

While market participants obsessed over weather patterns, few paused to consider the silent protagonist in this unfolding drama: inventories. The 2023–2024 winter, among the warmest on record, left a legacy of near-record storage levels. At the outset of the injection season, inventories stood at a staggering 700 Bcf—or 40%— above the ten-year average. Yet, tight fundamentals have nearly erased this surplus in a remarkable turn. Over the third quarter alone, inventories were drawn down by almost 400 Bcf. By quarter’s end, storage levels stood less than 5% above the norm, a quiet but profound shift that few have fully grasped.

This brings us to the present moment, where the market stands at a crossroads. If the coming winter delivers typical cold—after two years of unseasonable warmth—U.S. natural gas prices could well align with international benchmarks which currently hover near $14/MMBtu. The implications are vast, mainly as U.S. natural gas production, once seemingly boundless, now hints of rolling over.

Over the past fifteen months, growth in U.S. gas production has stalled. Indeed, in the past seven months, production has begun to contract. Since peaking in December 2023, U.S. dry gas supply has fallen by 3 Bcf per day—a 3% decline. Year-over-year data tells a similar story, with dry gas production now down by 1.2 Bcf per day, slightly more than 1%.

The natural gas bears, ever resourceful, have latched onto recent productivity data, pointing to gains in drilling efficiency across several shale plays as evidence of a potential resurgence. Yet this narrative, seductive though it may be, demands scrutiny. Our analysis, informed by deep neural networks, reveals that these productivity gains are not the herald of renewed growth but rather the predictable consequence of declining rig counts.

Consider this: in August 2022, the Baker Hughes natural gas rig count stood at 166. By February 2024, that number had dropped to 121, a 27% decline. Over the past seven months, the rig count has fallen further, reaching just 101—a 17% plunge in a remarkably short time. As every seasoned industry observer knows, exploration and production companies cut their least productive rigs first, leading to an inevitable but temporary boost in reported drilling productivity.

But this veneer of efficiency masks a more profound truth. Producers, facing dwindling options, have concentrated their remaining rigs on the final Tier 1 drilling areas within their plays. This “high-grading” of inventories explains the reported productivity gains of the past eighteen months but also signals an endgame. Our analysis suggests that Tier 1 drilling inventory in these plays is rapidly being exhausted. The accompanying graphics in this letter’s “Shale Fields and the Hubbert Curve” section lay bare this reality, using the Marcellus as a case study in depletion dynamics.

The broader picture is no less sobering. All U.S. natural gas production sources, whether from dedicated shale gas plays or associated gas from shale oil operations, are plateauing. Against this backdrop, demand is poised to surge. LNG exports are set to expand dramatically, while the data center boom adds another layer of consumption to the mix.

The result? A market that is shifting, after fifteen years of structural surplus, toward a long-running structural deficit. The abundance of shale gas has defined the natural gas story for the past decade and a half. That era, we believe, is drawing to a close, and the implications for prices—and the broader energy landscape—are profound.

Oil

“Hedge Funds Have Never Been This Bearish on Brent Crude Before.”
— Bloomberg, September 13th, 2024

The global crude oil market is steeped in gloom, its mood defined by a persistent, almost compulsive bearishness. The numbers tell the story: West Texas Intermediate crude has fallen 16%, while Brent is down 14%. Investors, spurred by fears of weak demand, whisper of a resurgence in U.S. shale production, and rumors of OPEC retreating from its production cuts, have retreated en masse. The malaise is so pervasive that even casual observers can’t miss it—headlines like Bloomberg’s serve as both symptom and diagnosis.

Yet, this moment offers something extraordinary for those with a contrarian bent. To them, today’s bearish consensus echoes another time and place: 2003. It’s an audacious comparison but not an unwarranted one. For readers who need reminding, 2003 was a year of extraordinary pessimism in oil markets. The Economist, never shy about forecasting the end of an era, ran a now-infamous August 2003 cover story titled “The End of the Oil Age.” 

Source: Economist

The reasons for their bearishness then are eerily similar to those dominating headlines today: weak demand, this time exacerbated by structural changes in the post-9/11 economy and surging non-OPEC supply.

What happened next, of course, defied nearly everyone’s expectations. Oil prices, seemingly buried under the weight of bearish consensus, staged a rally for the ages, climbing nearly fivefold over the subsequent five years. At the heart of this surge was something no one saw coming: a sharp, unexpected slowdown in non-OPEC supply growth. Only a handful of voices, including ours, predicted this pivotal shift, rooted in dynamics first described by King Hubbert.

Today, we find ourselves standing at a similarly critical juncture. Forces like those of 2003 are re-emerging, this time with U.S. shale oil at the epicenter. Just as the North Sea and Mexico’s Cantarell fields dominated non-OPEC supply growth in the 1990s, U.S. shale has been the primary driver of non-OPEC growth over the past fifteen years. But the signs of exhaustion are mounting. Production growth is slowing rapidly across nearly all shale plays, with the Permian Basin as the lone, albeit faltering, exception.

The parallels with 2003 don’t end there. Back then, as non-OPEC supply growth sputtered, OPEC began regaining market share and pricing power—a position they leveraged to stunning effect. We believe this pattern is about to repeat. This letter’s “Hubbert Peak” section lays out the forces driving the current slowdown in shale production, which has accounted for 90% of non-OPEC supply growth over the past decade and a half. Just as in 2003, OPEC stands poised to reassert its dominance— and, just as before, they are likely to wield their power with precision.

The sheer magnitude of bearish sentiment makes today’s setup particularly intriguing. Markets have a peculiar way of punishing consensus and the current alignment of factors suggests that today’s pessimism may be tomorrow’s opportunity. History tells us that significant shifts in oil markets often arrive unannounced and when they do, the magnitude of change can be breathtaking.

At the close of 2003, few could have imagined the bull market in oil that was about to unfold. Yet it did, fueled by dynamics many failed to appreciate until long after. Today, the stage is set for a similar reversal. The global oil market weighed down by the relentless pessimism of the crowd is once again presenting a rare investment opportunity.

The lesson of 2003 is as relevant now as it was then: when conventional wisdom becomes too comfortable, the market’s pendulum is often poised to swing the other way. Investors would do well to remember that history, like oil itself, tends to flow in cycles.

Coal

The coal market was quiet and trendless through the third quarter. In the U.S., Powder River Basin prices eked out a modest 3% gain, while Central Appalachian coal slid by 10%, and Illinois Basin coal followed suit with an 8% decline. Overseas, the picture was similarly mixed: Australian thermal coal prices, represented by Newcastle benchmarks, advanced 9%, while South African thermal coal, measured at Richards Bay, dipped by 6%. Meanwhile, Chinese steelmakers’ warnings of severe overcapacity cast a shadow over seaborne hard-coking coal prices, sending Australian hard-coking coal down nearly 10%.

U.S. coal equities—what few remain publicly traded—faltered dramatically in July and August, plunging by nearly 15%. But then mid-September saw a sharp reversal. China announced a major stimulus plan which ignited a furious rally, leaving the Dow Jones/Wilshire U.S. Coal Index up 15% for the quarter. History, as it often does, offered its own commentary: coal stocks have been the vanguard of every commodity bull market over the past 125 years. The pattern appears intact. Since the broader natural resource equity market bottomed in the summer of 2020, coal stocks have risen nearly sevenfold—outstripping other commodities and every major equity index, including the high-flying Nasdaq 100.

Since their peak in the summer of 2022, coal stocks have traded sideways. Yet signs suggest the Dow Jones/Wilshire Coal Index may have broken out to the upside. Should natural gas prices surge, as anticipated, utilities could pivot back to coal—a substitution the U.S. hasn’t seen in over a decade. Additionally, the re-election of Donald Trump to the presidency introduces a political wildcard. A less coal-hostile administration could ease the regulatory pressures that have weighed on utilities, slowing the closure of coal plants still in operation.

Coal stocks, in the meantime, languish at remarkably low valuations. After two years of listless trading, they could be poised for a resurgence. The natural gas market faces transformative shifts and, when combined with a friendlier political backdrop, the stage is set for a potential rally of notable proportions. For investors not constrained by ESG considerations, the opportunity seems compelling: coal stocks, long maligned, may once again earn their place in the limelight.

Gold & Precious Metals

Gold and silver prices increased in the third quarter, with gold climbing 13% and silver advancing 6%. Both metals have broken through significant technical levels— gold at the end of February and silver at the beginning of May—and their subsequent trajectories have been extraordinary. Since its breakout, gold has surged nearly 35% while silver, following its May rally, has gained 25%. These moves’ sustained strength and persistence suggest that precious metals have entered robust, new bull markets.

For a deeper dive, see the precious metals section of this letter where we explore the renewed interest of Western investors in the physical gold and silver markets. We also examine the notable behavior of central banks and the puzzling apathy Western investors continue to exhibit toward gold equities. This investor indifference, particularly striking given the compelling valuations of gold stocks, is a theme we analyzed in detail in our previous letter. The early stages of a gold and silver bull market are unfolding, offering investors a rare opportunity. With precious metals markets gathering momentum, we believe it is essential to maintain substantial exposure to this sector.

Uranium

Despite a steady price performance in the third quarter, the news flow in the uranium market was anything but quiet. Prices began the quarter at $86 per pound, high for the period, and drifted slightly lower to close at just under $82 per pound. While price volatility was absent, the torrent of uranium-related news more than compensated.

The most significant supply-side development came on August 23rd, when Kazatomprom, the world’s largest uranium producer, announced a substantial downgrade to its 2025 production guidance. In August 2023, the company had laid out ambitious plans to produce 79–80 million pounds of uranium in 2025—a dramatic 45% increase over 2023 levels. These goals had raised eyebrows during our April 2024 visit to Almaty, where we met with Kazatomprom executives. Our observations strongly suggested these targets were unattainable, a conclusion we shared in a blog post published two days before the company’s announcement. True to our forecast, Kazatomprom’s half-year update revealed a 13-million-pound shortfall against its initial 2025 projections, exacerbating the structural deficit in global uranium markets through 2030.

During our Almaty meetings, we also probed Kazatomprom on how much of its projected 2024 and 2025 production increases had been sold forward through contracts. While the company deflected our queries, their 2024 half-year financial statements revealed a notable 20% year-over-year decline in U3O8 inventories. It appears that reduced production targets for 2024 have been offset by inventory drawdowns, with 3.3 million pounds of uranium sold from stockpiles. Kazatomprom’s inventories now stand at 16 million pounds—a 40% reduction from five years ago. This sharp inventory decline raises the possibility that Kazatomprom may eventually need to enter the spot market to fulfill forward sales commitments, creating a potentially bullish inflection point.

The quarter’s most surprising news arrived just as it drew to a close. Microsoft announced a landmark deal to reopen the Three Mile Island Unit 1 nuclear facility which has been idle since 2019. Under the agreement, Microsoft will purchase 100% of the facility’s output to power its data centers. Following this, Google and Oracle unveiled plans to invest in small modular reactors (SMRs) for their own data center energy needs.

For a deeper analysis of these developments, refer to the uranium section of this letter, where we delve into the implications of these announcements. They reinforce our conviction that SMRs will dominate the nuclear power industry in the decades to come. This transformation carries enormous implications—not just for global climate goals, as SMRs replace coal-fired generation, but also for economic growth. SMRs are up to six times more energy efficient than hydrocarbon-based power generation, capable of providing the surplus energy needed to drive an increasingly power-intensive global economy.

The adoption of SMRs represents a paradigm shift in uranium demand, introducing step-change increases that remain conspicuously absent from most analysts’ models. With fundamentals for the uranium market growing increasingly bullish, these recent developments underscore the transformative potential of nuclear power in the 21st century.

Agricultural

Agricultural markets remained subdued in the third quarter as the 2024 North American harvest progressed. The USDA’s latest World Agricultural Supply and Demand Estimates (WASDE) offered few adjustments to 2024–2025 grain ending stocks. Against this backdrop, grain prices drifted lower, weighed down by persistent bearish sentiment.

Corn prices averaged $3.90 per bushel in the third quarter, a 12% decline from the $4.45 average in the second quarter. Soybeans averaged $10.25 per bushel, down 14% from $11.85, while wheat prices fell 10% to $5.45 per bushel from their previous $6.10 average. Speculative traders maintained historically bearish positions, particularly in corn and soybeans. July saw corn futures hit their second-largest net short position ever, with nearly 240,000 contracts sold short. Similarly, soybean futures recorded their second-largest bearish position in August, with 185,000 net shorts, only surpassed by March’s record of 200,000. Though slightly less aggressive, wheat traders ended the quarter still net short.

Yet, this bearish speculative activity sharply contrasts commercial traders’ behavior— the so-called “smart money.” Commercials have maintained near-record long positions, a strong indicator that the two-and-a-half-year bear market in grains, which has seen prices retreat by over 50% from their post-Russian invasion highs, could be nearing its end.

What might catalyze a reversal?

At our 2024 Investor Day, Shawn Hackett, author of the Hackett Agricultural Report, provided compelling insights into potential drivers. Hackett’s presentation focused on the alignment of solar and planetary cycles, suggesting the onset of another Gleissberg Cycle—an 88-year phenomenon tied to eight 11-year solar cycles. Historically, the last Gleissberg Cycle coincided with the devastating Dust Bowl of the 1930s. While this theory remains controversial, Hackett and we at Goehring & Rozencwajg see a connection.

Current conditions lend weight to the argument. Extreme droughts are already gripping major agricultural regions like Brazil, Ukraine, and Russia—among the worst in over a century. Could these record droughts be early signs of the Gleissberg Cycle’s influence on global climate patterns? And could the U.S. Midwest, which has thus far been spared, soon experience similar drought conditions?

Hackett highlighted an intriguing parallel: the recent dry spell in the eastern United States. Cities like New York, Philadelphia, and Washington, D.C., have set records for lack of precipitation, with New York experiencing its second-longest dry stretch in recorded history. Moreover, much of the country, especially the Midwest, is now grappling with moderate to extreme drought conditions, a pattern reminiscent of the fall of 1929, which preceded the historic drought of 1930 and the onset of the Dust Bowl.

Valuations in agricultural markets remain extraordinarily cheap and bearish psychology still dominates. If the Gleissberg Cycle does usher in a prolonged drought, it could fundamentally alter global grain market dynamics, driving prices sharply higher and positioning agricultural equities as market leaders. This potential inflection point is one we will monitor closely in the months ahead.

Base Metals & Copper

Base metals and copper prices firmed in the third quarter, driven by the Chinese government’s unexpected stimulus package announced on September 24th. Measures included reducing mortgage rates for existing homeowners, lowering commercial banks’ reserve requirements, and creating a $100 billion facility to accelerate sales of unsold housing stock and support the stock market. The announcement sparked a sharp rally in Chinese equities and ignited investor optimism that China’s economic slowdown might stabilize.

Zinc led the base metals rally with a 5% gain, followed by aluminum (up 3.5%), copper (up 2.5%), and nickel (up 1.5%). Copper and base metal equities also performed strongly. The COPX copper equity ETF advanced 4.8%, while the XBM CN ETF, which tracks the S&P Global Base Metals Index, rose 5.22%.

This letter’s introductory essay explored the increasingly uncertain outlook for renewable energy and its implications for global copper demand. Investors in copper markets have adopted bullish stances in recent years, heavily influenced by aggressive demand forecasts from consulting firms. These forecasts are rooted in assumptions about widespread renewable energy adoption—assumptions we now view as overly optimistic due to the low energy efficiency of renewables.

For a deeper dive, we encourage you to read the copper section of this letter, where we examine emerging supply and demand dynamics in the global copper market. Despite intensifying challenges in China’s property development sector, Chinese copper consumption continues its strong growth. This growth appears tied to massive investments in wind and solar farms to reduce China’s reliance on imported energy. We attempt to disentangle copper consumption driven by these renewable projects from the baseline copper demand required to support China’s growing per capita GDP. As we’ve highlighted in previous letters, China is now overconsuming copper for the first time in twenty-five years—a trend that is partially linked to its renewable energy investments, a largely underexplored aspect of global copper demand that we aim to quantify.

While we remain bullish on copper in the short term due to strong demand and a deceleration in supply growth over the past nine months, we urge caution over the long term. Cracks are beginning to form in the widely accepted bullish copper narrative. Both supply and demand dynamics warrant closer scrutiny, particularly as demand assumptions tied to renewables face growing challenges.

Curious to learn more?  Read more in our Q3 2024 research newsletter, available for download below.

Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen or experience. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. Historical performance is not indicative of any specific investment or future results. Investment process, strategies, philosophies, portfolio composition and allocations, security selection criteria and other parameters are current as of the date indicated and are subject to change without prior notice. This communication is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Nothing in this communication is intended to be or should be construed as individualized investment advice. All content is of a general nature and solely for educational, informational and illustrative purposes. This communication may include opinions and forward-looking statements. All statements other than statements of historical fact are opinions and/or forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the beliefs and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such beliefs and expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements. All expressions of opinion are subject to change. You are cautioned not to place undue reliance on these forward-looking statements. Any dated information is published as of its date only. Dated and forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any dated or forward-looking statements. Any references to outside data, opinions or content are listed for informational purposes only and have not been independently verified for accuracy by the Adviser. Third-party views, opinions or forecasts do not necessarily reflect those of the Adviser or its employees. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.