too much lng

A bit of insight into the loss of interest in RFE


By Christine Buurma
Of DOW JONES NEWSWIRES


NEW YORK (Dow Jones)--The increasingly volatile relationship between U.S. and U.K. natural gas prices has clouded the outlook for liquefied natural-gas cargoes in 2010, creating trading opportunities as the market tries to gauge whether already low prices in both countries will decline further on abundant global supplies.

The difference between the price of gas at the benchmark Henry Hub in Louisiana and the price of the fuel at the U.K.'s National Balancing Point, or NBP, hub is closely eyed by the gas industry as a key determinant of LNG flows in the Atlantic. When U.K. gas prices are higher than U.S. prices, more LNG will arrive in the British Isles; when the reverse is true, more gas comes to North America.

Although the U.S.-U.K. price spread itself isn't yet widely traded, that could change as more LNG comes to the Atlantic from new liquefaction facilities in Qatar, Yemen and Russia.

"Traders will be watching these (U.S. and U.K.) contracts very closely, hedging into one and waiting for the upside on the other," said Murray Douglas, North American LNG analyst for Wood Mackenzie in Houston.

Gas traders have been tracking LNG flows because any large shipments of the fuel to either country will place further downward pressure on prices. The global economic downturn has led to brimming gas inventories in the U.S. and the U.K., and U.S. prices have been depressed by a flood of domestic supply. But as new LNG liquefaction facilities begin operations, super-cooling the gas into a liquid for export overseas, supplies of the fuel will be bound for both the U.S. and U.K.

The spread between U.K. and U.S. summer 2010 natural gas prices is likely to remain tight in the coming months as each country struggles to be the "market of last resort" for LNG cargoes, the destination for LNG when shippers have exhausted all other options. The difference between U.K. and U.S. prices is expected to shift back and forth between a premium and a discount, analysts said.

"The spread scenario is pretty volatile," said Edward Kott, an analyst with brokerage LCM Commodities in New York. "It could go either way."

Gas prices at Henry Hub traditionally traded at a premium to NBP prices during the summer because traders believed until recently that U.S. gas production was in a state of terminal decline. During the winter, gas prices in the two countries would be in relative parity because the U.S. can store large volumes of gas underground to meet heating demand.

But the dynamic between U.K. and U.S. gas prices has changed as booming U.S. production drives prices lower there. From mid-2007 to early 2009, June U.S. gas prices began trading below their U.K. counterpart because of oversupply, at one point trading more than $5 a million British thermal units below NBP gas, according to data from LCM Commodities.

Over the past few weeks, the spread between the U.K. and U.S. has tightened. U.K. NBP gas was at a slight premium to Henry Hub gas Thursday, with NBP gas for next-day delivery trading at $5.10/MMBtu and Henry Hub gas at $5.02/MMBtu. Although the U.S. is still facing an overabundance of gas, the U.K. market has also weakened as the country attempts to absorb excess LNG cargoes.

Market participants are watching withdrawals from the countries' storage facilities during the winter and tracking economic indicators to determine how the U.S.-U.K. gas price spread will play out this summer. Traders have been looking for signs of economic recovery that would boost the demand for gas.

"There is probably more of an arbitrage now between U.K. and U.S. natural gas prices than there was in the past," said Sabine Schels, an analyst with Bank of America Merrill Lynch Global Research in New York.



-By Christine Buurma, Dow Jones Newswires; 212-416-2143; [email protected]