Trump’s Biggest Loser?

Natural gas could be the big loser from Trump administration energy policies.

Yes, President Donald Trump wants to help grow all kinds of fossil-fuel production, and help drillers in particular. But more oil drilling is also likely to produce more gas, stuffing a market still recovering from a glut. More coal is also more competition for gas at power plants. And  Mr. Trump’s conflict with Mexico is the biggest risk of all because gas producers have become reliant on Mexican buyers.

It has already been a bad few months for gas producers. A mild winter is limiting demand for the heating fuel, more rigs are heading out to work, and investors are selling off fearing the return of oversupply.

Gas producers are five of the eight worst performing exploration-and-production companies on the stock market in the last three months. The sector as a whole is up about 15% in that span (judging by the SPDR S&P Oil & Gas Exploration ETF), but several gas companies that had a huge 2016, including Southwestern Energy Co., Rice Energy and Consol Energy, are underperforming with, at best, gains of less than 1.5%. Many are losing and Gulfport Energy, a big Appalachian driller, is the worst of all, down 11% in three months.

The fact that that troubled stretch started nearly on Election Day is largely — but not entirely — a coincidence. In addition to fears about heavy production and soft demand, now, investors also have to face the risk of the new president’s brinkmanship with Mexico, the gas market’s biggest new customer.

The U.S. sends record amounts of gas to Mexico, 5% of annual production, Bank of America Merrill Lynch writes Monday. The Trump administration has become vocal about forcing Mexico to pay for a border wall that Mr. Trump promised as a candidate. If the U.S. pursues that, it could spark a trade war, and Mexican retaliation “could severely hurt exporters of US natural gas and drive down prices,” the bank’s analysts wrote.

The chance of that happening is still pretty low, but it is higher than it was a month ago, said Pearce Hammond, an analyst at Piper Jaffray Cos.’ Simmons & Co. International in Houston. Back then, many investors were hoping Mr. Trump would soften the rhetoric that had been common on his campaign, which doesn’t appear to be happening.

Pipeline exports to Mexico have already helped ease a glut that weighed on the market for the last year, lifting prices off of record lows and making gas futures one of the best performing commodities of 2016. Limiting that alone could return the market back to a glut.

And investors are having to recalibrate expectations that exports of liquefied-natural-gas would help with long-term demand growth starting in 2018, Mr. Hammond said. Mexico is today’s largest importer of U.S. liquefied-natural-gas in addition to all the gas it brings in by pipe, according to Bank of America Merrill Lynch.

“Most people are bearish on gas anyway,” Mr. Hammond said. “So this would only be yet another reason to be bearish.”