Head of Commodity Strategy
Summary: The global gas and power market remains on fire, with tight supply and worries about a winter supply crunch driving European gas prices to new record highs on a daily basis. During 2021, this development has driven the prospect for an increasingly expensive green transformation, and with that, an increased focus on other sources of energy, most noticeable nuclear power. As a result, the uranium mining sector enjoyed a steady rise up until August when prices suddenly went nuclear after a recently established fund started hoovering up the physical metal.
Our investment focus:
NL TTF Gas October 2021 (GASNLBASEOCT21)
Phelix-DE Base Year 2022 (POWERDEBASECAL22)
Cameco Corp (CCO:xtse)
Sprott Physical Uranium Trust (U_UN:xtse)
Global X Uranium ETF (URA:arcx)
The global gas and power market remains on fire, with tight supply and worries about a winter supply crunch driving European gas prices to new record highs on a daily basis. A surge which in turn is driving strong demand for coal and emissions to off-set the use of the higher polluting fuel. The end result being an off-the-chart surge in power prices across the European continent which increasingly is being noted by consumers and governments, with politicians starting to worry about its potential impact on the support for the green transformation push.
To put the current elevated prices in Europe into perspective, the price of Dutch TTF first month gas has risen to near €66/MWh, more than four times higher than the average seen during the previous five years, and more than $130 per barrel of oil equivalent. German power prices for 2022 delivery has risen to €102.25/MWh which is 2.7x the five-year average. Tight supply of gas has forced power generators to turn to coal, thereby not only driving the price of coal delivered at Rotterdam to a multi-year high but also increasing demand for emissions allowances under the European Union’s Emissions Trading System.
The rapid move towards decarbonizing European energy consumption has become unstuck with power generation from wind and sun struggling to deliver the needed baseload. Adding to this the prospect for tight supplies, with stock levels at a multiyear low ahead of winter, and the perfect storm of price supportive developments have emerged.
The old saying that the best cure for a high price, is a high price, may to a certain extent ring true in the current environment. Not only do we risk that some industries could be forced to cut electricity consumption this winter, but also the recent rally to a record in Europe has seen prices catch up with those in Asia, thereby potentially reopening the prospects for LNG cargoes setting sail for Europe instead.
However, a very active US hurricane season has created supply disruptions in the US as well, and it has helped drive the Henry Hub gas futures contract to a 7 ½-year high at $5.24/MMBtu. However from a European supply perspective, a very active US hurricane season, most recently Hurricane Nicholas making landfall in Texas today, has been threatening to disrupt liquefied natural gas facilities on the US Gulf coast.
Uranium going nuclear: Another source of energy which has been on the receiving end of strong green transformation demand, is the uranium mining sector (URA:arcx). However following a strong surge during the first part of 2021 the sector’s advance started to slow in the realization the price of uranium U308 remained stuck around $30/lb. This stalemate however changed dramatically during the past month when the Sprott Physical Uranium Trust (U_UN:xtse) arrived on the scene. The Trust was created to invest and hold most of its assets in uranium, and during the past month it has accumulated millions of pounds of the physical commodity used to power nuclear reactors.
The removal of physical uranium U308 from the market has led a rally in the price to $44/lb, and while the Sprott Trust has rallied 82% this past month, Cameco Corp (CCO:xtse), one of the world's largest producers of uranium is up by 55%. Uranium investors are like crypto investors, very vocal and very committed to their belief in much higher prices. The Sprott Uranium Trust has given them the product that through the removal of physical metals can support prices through the creation of an increasingly tight market.
The long-term success of uranium as an investment theme will depend on whether governments around the world, especially in Europe, decides nuclear power is an unavoidable next step to reduce the global carbon footprint. However, it is worth keeping in mind that such an increase in demand may not occur for several years, given the time it takes to build a modern nuclear powerplant.
Therefore, it is worth keeping in mind that while the current surge in gas and power is related to a change in supply and demand fundamentals, the rally in uranium is purely driven by speculators, some looking for a short-term reward while others are betting on a bright future for the sector. Without the discovery of new sources of energy or an expansion of nuclear power, it will be impossible to meet planned reductions in global emissions. With this in mind the nuclear sector is likely to have a bright future ahead, but it needs to be supported by tightening supply and demand fundamentals, not a speculative fund hoovering up metals that can easily be unleashed back into the market when and if investors move onto other investments.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
