A New Global Market for Natural Gas

In late 2006, China for the first time in its history became a net coal importer. This changed the dyanmics of the world's energy market. Korea and Japan, previously importers of Chinese coal, were sent scrambling for alternative sources of energy. What they found in the winter of 2007 was LNG for $18-$20/BTU. China too was a willing buyer.

The coal scramble was also felt in Europe. Australian coal was bottlenecked and/or kept in the Asian region. Power outages in South African coal mines made the situation worse for Europeans as they lost out on significant supply. What followed was a ramp in coal prices as coal was shipped off the east coast of the U.S. to willing buyers in Europe.

Fast forward to today and enter Russia. Russia's invasion of Georgia is a dangerous precedent. Russia controls over 25% of Europe's natural gas and in the winter of 2006 used it as a weapon against Eastern Europe. Russia's true intent today may very well be to take further control of the world's energy market. Does one really believe that the Russian government cares anything about 70,000 ethnic Russians living in the mountains of Georgia?

If China's coal deficit is greater today than it was just one year ago and the geopolitical situation is worse, one could conclude that liquefied natural gas [LNG] in the winter of 2008-2009 will fetch a minimum of last year's $18-$20/BTU.

Last year was the year natural gas became a global market. This year it will be reinforced. The market for natural gas has changed and so should one's perspective.

As one watches the price of natural gas collapse in the U.S., is it possible the price remains near $8.00 this winter as Asians and Europeans pay more than two times that price?

Stock position: None.

Comments

[buyitcheap:]

You're exactly right. This is all about the pipeline.

2008 Aug 13 08:24 AM

[Paul Killinger:]

Interesting thesis, but there is no such thing as a GLOBAL market for NG, thank God. The only way to ship it over water is as LNG, hence the high prices resulting from VERY limited supplies.

This is a godsend for the U.S., I might add. It is the ONLY fuel that is abundant and environmentally friendly enough to meet our electricity (and transport?) needs here in the U.S. for the next several years.

2008 Aug 13 10:23 AM

[VintonCounty:]

Each form of energy has a best use, and it is foolish to use it other ways. For example, liquid hydrocarbons are ideal for transportation. It is foolish to use any other form of energy for transportation, and in a free market liquid hydrocarbons will find their highest prices in transportation.

For coal the best uses are generating electrical energy and making coke. For nuclear fuel the best use is generating electrical energy.

For natural gas, the best use is space heating. To use it for electrical generation is wasteful. It is so used because governments have shackled coal and nuclear with laws and regulations. If governments did not rig the game, economic decision makers would choose coal or nuclear for most electrical generation. An investor would say, "Why should I care about that theoretical stuff?" The reason is that it will benefit future generations.

2008 Aug 13 04:51 PM

[Alamo:]

I couldn't agree more with the statement that energy sources have a "best use" aspect. And the current "best use' of natural gas is as the transportation fuel of choice. If indeed the use of natural gas as the heat energy for electricity generation is wasteful it seems its use as our national transportation fuel source would be the ideal use for natural gas in the form of compressed natural gas(CNG).

CNG is readily liquified and then can be used very similarly to gasoline. It can also be made directly into high octane gasoline. The compelling thing about CNG though is its availability right here in the United States. Nothing to invent, no military required to go seize it from a foreign country or threaten those who might disrupt our perceived absolute right to their resources per the Reagan energy doctrine. No, none of these disastrous consequences required. We simply produce the massive reserves of natural gas that we have under our feet---about 2 miles that is, but easily obtainable with today's production technology.

Clean burning, abundant supplies and about 1/3 less expensive than gasoline, but best of all it's 100 percent red, white and blue American.

The national conversion to CNG would create millions of new jobs in building the 25,000 CNG islands at gas stations around the nation and converting the nation's auto, bus, truck and rail fleets to CNG power. It might even save the Big 3 auto makers who bet on a losing horse in the fuel race. Crude oil is dirty, expensive and unavailable--a fuel we don't have, shouldn't want. don't need and cannot afford.

2008 Aug 14 11:54 PM

[Breadnight:]

Once you start using natural gas for transportation, the price will jump so high that no one will use it. Same thing happened in the 90's to the natural gas fired power plants. They began using so much nat gas that they became the market and the prices shot up past what they used in their economic analysis, they ran at a loss for years!! (maybe still do) -very dumb. Keep this in mind.

2008 Aug 19 09:09 AM