Now, Shortages of Natural Gas

As reported in a New York Times article, liquefied natural gas [LNG] terminals built in Louisiana are becoming a home to empty supertankers that were expected to be importing LNG from around the world. Shipments of LNG to the U.S. are falling, with the LNG instead going to Spain and Japan, further depleting U.S. stockpiles. Unlike crude oil, natural gas is more of a regional commodity, although its price is connected somewhat to crude oil prices. Historically, crude oil has traded at about a 6-8 multiple to natural gas (or natural gas has traded at a 6-8 times discount to crude oil). Recently, natural gas has not kept up as crude oil continues to climb in price.

Given that competition is increasing for LNG, and since others are willing to pay more for the commodity, the U.S. will continue to get shut out unless changes are made. Due to reduced imports, it is estimated that the U.S. will only have 3.1 trillion cubic feet of natural gas in storage at the end of October, a figure that is almost 1 trillion cubic feet below what is considered full storage.

Until the pricing structure in the U.S. becomes competitive with the rest of the world, it is unlikely that storage levels will increase, although the same cannot be said for natural gas prices. Historically, demand is usually lower in the spring, only to start increasing again in the fall as we enter the winter heating season. This year, natural gas prices have continued to rise through the spring as its price moves with crude oil, even if not at the same historical multiple. If supply constraints continue we may begin to see natural gas prices continue to rise, even if crude oil prices stay flat or even slightly decrease, as prices move to and stay within historical multiples.

Disclosure: Position UNG

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•  
  

  • oil baron: 
  • Comments (21)
  Natural gas and oil have rarely traded at the 6:1 price ratio despite the relative btu content ratio of 6:1.
  Historically the price relationship has been 10:1 and it continues today.
  
  
  

  2008 May 29 03:57 PM
•  
  

  • Mmarrkk: 
  • Comments (386)
  Agreed if you are considering the US market or North American market. But look at Japan, where a lot of the LNG is going. Spot prices for cargoes are running almost $15/MCF, still not 6:1 but more like 9:1. Partly due to the speculative bubble in oil and mostly because now that natural gas has become more of an worldwide commodity, its price will go up. The price in the US is mainly suppressed because we CURRENTLY have a pretty good supply. But when we start bringing on expensive gas, you'll see prices going up and getting closer to parity with global prices.

  2008 May 29 04:15 PM
•  
  

  • OJO Zafado: 
  • Comments (66)
  LNG is by definition a world market. The North American gas market so far has operated independent of it. LNG faces hurdles based on NIMBY opposition to even the off shore submerged turret bouy terminals used by regassification ships as operated by Excelerant. Add to that a history of when the US first started importing Nat Gas from Algeria in the '70s, where as soon as the infrastructure was put in place to import the gas the Algerians voided the long term price contract. El Paso took a bath on the project. LNG is subject to world political disruptions. We have seen the problems in Eastern and western Europe with the price escalating due to the Russian supply being heavily "taxed" and steady hikes in what Russia chooses to charge. We in the North American market are still getting "cheap" gas from Canada. Export, provincial, and future taxes are all expected to rise on Canadian gas. Canada supplies us with 15% of our natural gas , huge amounts of which have recently been diverted to oil sands mining projects. Oil above $80/BBL make this oil recovery profitable. As these projects continue to become even more developed the US N/G market will feel the pinch. Ultimately the weaning away from oil and the number of LNG bottoms in the world tanker fleet will lead to the full globalization of the Nat Gas market. It is seldom reported or appreciated that the worlds largest nuclear power plant to have a serious accident was not TM Island or Chernoble. The Kazawasaki plant in Japan was damaged by an earthquake and leaked radioactive materials into the Sea of Japan. This has made Japan re-examine it's nuclear power industry and increase imports of gas. They are now competing with China and Korea for those cargoes. China just had an earthquake. Now we see Indonesia a major source of exported gas leaving OPEC and with 235 million in pop becoming a net importer of oil. It would seem that they might soon begin curbing exports of gas by imposing stiff export taxes. Ours will be a Winter of discontent , hardly made sunny and warm by the next leader of "The Free Money World". I agree with the author that the price in N/A is headed higher. "unless changes are made", does not ring true. It is all about supply and demand. When demand exceeds N/A production then the idle gas terminals will begin recieving more loads. It would seem there actually are enough of these terminals in place ready to operate as of now. More terminals may indeed be needed in the future. They may more likely be built in Mexico, British Columbia or the Atlantic Provinces of Canada. There is a project being engineered to run an under sea pipline from the Bahamas to Florida. The LNG would of course arrive in the Bahamas and be regassified. While the political situation in Venezuela will result in most of their off shore gas remaining untapped, a considerable amount of exploration and increase in production is expected from Trinidad. The US still gets very little gas from Mexico. They are likely to become a more significant supplier as well. I own a portfolio of NG funds and stocks that have all been performing well. FSNGX,UMESX,EP-PrC, SNG,PGH,HTE,AAV,PWE, PVX & IEO. Rather than own UNG or FCG I am thinking of taking a position KYE. I recently sold my position in ENY but will consider buying it again if it comes back to earth.

  2008 May 30 12:18 AM
•  
  

  • billp37: 
  • Comments (370)

  •  • Website: http://www.prosefights.org/nmlegal/theinve...
  PNM proposes to generate about 49% of new electricity using natural gas.
  
  Hmm?
  
  www.prosefights.org/pn...

  2008 May 30 12:32 PM
•  
  

  • Greg Pinelli: 
  • Comments (547)
  Tough world shaping up out there! Of course, the entire notion propagated by the likes of market manipulators like Geo Soros is that oil is 30% speculative...total garbage. Believe me, if anyone should know better it's the master con man himself.
  The US is likely to find itself outbid and oumaneuvered in many areas for many resources. Nat gas has been a shortfall waiting to happen ever since the environmentally self conscious overbuilt gas facilities and told us nuclear power was horrible.
  By the by...this whole oil/nat gas ratio is a waste of time..How can you possibly have an investible ration made up of 2 commodities about which we only have faint notions of what's really left...and very likely exist at dramatically different supply and use rates??? You'll just give yourselves a headache.

  2008 May 30 11:40 PM
•  
  

  • DaveinHacke...: 
  • Comments (76)

  •  • Website: http://thehackensack.blogspot.com/
  "Historically the price relationship has been 10:1 and it continues today."
  
  Oil Baron,
  
  According to this Rice University study: ( www.rice.edu/energy/pu... ), the historical ratio as been 7.5 to 1.

  2008 Jun 01 03:35 AM
•  
  

  • 2-cents: 
  • Comments (27)
  Not very long ago, check-book drillers (those who have very high production costs) had to reduce their drilling programs due to "higher-than-average" natural gas inventory. Many Canadian gas producers cut their gas drilling right down, not very long ago.
  Wall Street analysts fell over each other to down grade natural gas producers and the gas-levered oilfield services companies. Not very long ago!!!!!
  Both oil and gas are produced as Just-In-Time products, thanks to Wall Street. One hurricane hitting the Gulf of Mexico, prices would look very cheap now.
  

  2008 Jun 03 07:30 AM

Comments

[oil baron:]

Natural gas and oil have rarely traded at the 6:1 price ratio despite the relative btu content ratio of 6:1.
Historically the price relationship has been 10:1 and it continues today.

2008 May 29 03:57 PM

[Mmarrkk:]

Agreed if you are considering the US market or North American market. But look at Japan, where a lot of the LNG is going. Spot prices for cargoes are running almost $15/MCF, still not 6:1 but more like 9:1. Partly due to the speculative bubble in oil and mostly because now that natural gas has become more of an worldwide commodity, its price will go up. The price in the US is mainly suppressed because we CURRENTLY have a pretty good supply. But when we start bringing on expensive gas, you'll see prices going up and getting closer to parity with global prices.

2008 May 29 04:15 PM

[OJO Zafado:]

LNG is by definition a world market. The North American gas market so far has operated independent of it. LNG faces hurdles based on NIMBY opposition to even the off shore submerged turret bouy terminals used by regassification ships as operated by Excelerant. Add to that a history of when the US first started importing Nat Gas from Algeria in the '70s, where as soon as the infrastructure was put in place to import the gas the Algerians voided the long term price contract. El Paso took a bath on the project. LNG is subject to world political disruptions. We have seen the problems in Eastern and western Europe with the price escalating due to the Russian supply being heavily "taxed" and steady hikes in what Russia chooses to charge. We in the North American market are still getting "cheap" gas from Canada. Export, provincial, and future taxes are all expected to rise on Canadian gas. Canada supplies us with 15% of our natural gas , huge amounts of which have recently been diverted to oil sands mining projects. Oil above $80/BBL make this oil recovery profitable. As these projects continue to become even more developed the US N/G market will feel the pinch. Ultimately the weaning away from oil and the number of LNG bottoms in the world tanker fleet will lead to the full globalization of the Nat Gas market. It is seldom reported or appreciated that the worlds largest nuclear power plant to have a serious accident was not TM Island or Chernoble. The Kazawasaki plant in Japan was damaged by an earthquake and leaked radioactive materials into the Sea of Japan. This has made Japan re-examine it's nuclear power industry and increase imports of gas. They are now competing with China and Korea for those cargoes. China just had an earthquake. Now we see Indonesia a major source of exported gas leaving OPEC and with 235 million in pop becoming a net importer of oil. It would seem that they might soon begin curbing exports of gas by imposing stiff export taxes. Ours will be a Winter of discontent , hardly made sunny and warm by the next leader of "The Free Money World". I agree with the author that the price in N/A is headed higher. "unless changes are made", does not ring true. It is all about supply and demand. When demand exceeds N/A production then the idle gas terminals will begin recieving more loads. It would seem there actually are enough of these terminals in place ready to operate as of now. More terminals may indeed be needed in the future. They may more likely be built in Mexico, British Columbia or the Atlantic Provinces of Canada. There is a project being engineered to run an under sea pipline from the Bahamas to Florida. The LNG would of course arrive in the Bahamas and be regassified. While the political situation in Venezuela will result in most of their off shore gas remaining untapped, a considerable amount of exploration and increase in production is expected from Trinidad. The US still gets very little gas from Mexico. They are likely to become a more significant supplier as well. I own a portfolio of NG funds and stocks that have all been performing well. FSNGX,UMESX,EP-PrC, SNG,PGH,HTE,AAV,PWE, PVX & IEO. Rather than own UNG or FCG I am thinking of taking a position KYE. I recently sold my position in ENY but will consider buying it again if it comes back to earth.

2008 May 30 12:18 AM

[billp37:]

PNM proposes to generate about 49% of new electricity using natural gas.

Hmm?

www.prosefights.org/pn...

2008 May 30 12:32 PM

[Greg Pinelli:]

Tough world shaping up out there! Of course, the entire notion propagated by the likes of market manipulators like Geo Soros is that oil is 30% speculative...total garbage. Believe me, if anyone should know better it's the master con man himself.
The US is likely to find itself outbid and oumaneuvered in many areas for many resources. Nat gas has been a shortfall waiting to happen ever since the environmentally self conscious overbuilt gas facilities and told us nuclear power was horrible.
By the by...this whole oil/nat gas ratio is a waste of time..How can you possibly have an investible ration made up of 2 commodities about which we only have faint notions of what's really left...and very likely exist at dramatically different supply and use rates??? You'll just give yourselves a headache.

2008 May 30 11:40 PM

[DaveinHacke...:]

"Historically the price relationship has been 10:1 and it continues today."

Oil Baron,

According to this Rice University study: ( www.rice.edu/energy/pu... ), the historical ratio as been 7.5 to 1.

2008 Jun 01 03:35 AM

[2-cents:]

Not very long ago, check-book drillers (those who have very high production costs) had to reduce their drilling programs due to "higher-than-average" natural gas inventory. Many Canadian gas producers cut their gas drilling right down, not very long ago.
Wall Street analysts fell over each other to down grade natural gas producers and the gas-levered oilfield services companies. Not very long ago!!!!!
Both oil and gas are produced as Just-In-Time products, thanks to Wall Street. One hurricane hitting the Gulf of Mexico, prices would look very cheap now.

2008 Jun 03 07:30 AM