LNG Imports, Domestic Output May Send U.S. Gas Prices Lower, RBC Predicts
April 18 (Bloomberg) -- Higher imports of liquefied natural gas and increased U.S. natural-gas production are likely to push prices lower, RBC Capital Markets said.
Analysts, led by Joseph Allman in Houston, said prices may drop below $5 per million British thermal units later this year. Benchmark natural-gas futures in New York have been between $6 and $8 per million Btu since February, after plunging 50 percent from a record $15.78 in December. RBC predicts gas will average $7.50 per million Btu this year and $6.50 in the second quarter.
``We're concerned about natural gas in the near term,'' Allman said in an interview. ``We have a whole lot of gas in storage and it looks like it's going to get worse. One of the things that's going to make it worse is a surge in LNG imports.''
Gas for May delivery rose 21.3 cents to $7.79 per million Btu at 11:44 a.m. today on the New York Mercantile Exchange. Mild weather across the nation in January and February pared gas demand, leaving a glut of the fuel in underground storage caverns and pushing prices down.
Production of LNG, in which gas is super-cooled until it is one-six-hundredth of its original volume and can be shipped by tanker, has increased by about 4.5 billion cubic feet a day since the beginning of 2005, RBC said in an April 10 report. Much of the LNG produced by foreign liquefaction facilities will find its way to the U.S., the report said.
``With winter essentially over, America's competitors for LNG simply do not need a lot of that capacity and/or cannot handle the volumes that are on line'' or about to come on line, the report said.
LNG Imports
Imports of LNGs averaged 1.73 billion cubic feet a day last year, according to Energy Department statistics. They have more than doubled from 626.5 million cubic feet daily in 2002. About 60 billion cubic feet of gas is consumed daily in the U.S.
U.S. gas inventories were 1.7 trillion cubic feet as of March 31, the highest for the end of the heating season since the Energy Department started keeping records in 1993.
The U.S. has excess capacity to import LNG, which requires special terminals to turn the LNG back into a gas. The U.S. ``recently has expanded base capacity from 2.6 billion cubic feet a day to 3 billion and peak capacity from 3.8 billion to 4.5 billion,'' the analysts said. ``Peak capacity is the most important number here, since plants can really run at peak levels 95 percent of the time.''
Forecasters including AccuWeather.com and scientists at Colorado State University, predict the U.S. will experience more than the normal number of hurricanes this summer, prompting some analysts to predict that gas prices may be pushed higher by supply interruptions. Increased LNG imports could mitigate supply shortfalls caused by hurricanes or excessive heat, RBC said.
Hot Weather
U.S. futures prices signal that some consumers are expecting today's glut to disappear before next winter. Futures prices for December through March are still above $11 per million Btu on the Nymex. Gas use peaks in winter as furnace use increases.
The RBC analysts take a different view. LNG imports are ``enough to make a high-storage situation worse and enough to partially offset either a hot summer or some of the curtailed production from a bad storm,'' the report said.
Record Storage
Hot summer weather could increase demand by 300 billion cubic feet by November. Even with that much demand, gas in storage by the beginning of winter could be at a record level, RBC said. Including LNG imports, utilities and other big gas users could have as much as 3.5 trillion cubic feet of gas on hand Nov. 1, the report said.
With normal summer weather, gas in storage could reach 3.7 trillion cubic feet by Nov. 1, RBC said. The Energy Department estimates storage facilities in the U.S. could hold as much as 3.9 trillion cubic feet.
``In our view, to significantly reduce the storage surplus, the U.S. needs a very hot summer and one or two 100-year storms,'' RBC said ``This scenario could happen, but we think it is not likely.''
Last year's hurricanes in the Gulf of Mexico failed to lower total U.S. production, the strategists said, an indication that the nation's output has increased. Supplies from Texas rose 1 billion cubic feet a day and Wyoming's daily gas production gained 400 million cubic feet in January from a year earlier, according to the Energy Department.
``Once the market accepts that LNG imports are spiking and/or that the gas production situation has improved, it will likely take gas prices down further,'' the strategists said.
Excess supplies could lead to a greater disparity between oil and natural-gas prices. A barrel of oil ``traditionally'' traded at 7.3 times the price of a million Btu of gas, the strategists said. Because of high supplies oil prices could exceed 10 times that level.
Lower gas prices likely won't affect imports of LNG to the U.S., the strategists said.
``The liquefaction plants will continue to send out cargoes, even if they receive lower prices, since they have debt service issues to attend to,'' RBC said.
To contact the reporter on this story:
Gene Laverty in Calgary at glaverty@Bloomberg.net.
Last Updated: April 18, 2006 12:30 EDT
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I thought I had these LNG economics all figured out (thanks to you & que) but now I read an article like this and I'm back to the drawing board.
If I understand the RBC guy, he seems to think that LNG will come flooding into the US, even at < $5 prices, during all seasons other than the winter. This seems to at least partially contradict what you had said earlier. Would appreciate some more help on this stuff, anyone. Be patient, I'm slow but I eventually catch on (usually!!). |
