LNG prices dive as output increases

Analysis: demand for the fuel that powers factories and industrial plants around the world has slumped in most industrialised economies.

The price of fuel has fallen significantly, but not as far and as fast as natural gas, which powers much of the West's industry.

If the price of a barrel of crude oil seems low at roughly a third of what it cost last summer, then consider what has happened to gas prices, as demand for the fuel that powers factories and industrial plants around the world has slumped in most industrialised economies. In some countries, consumers are getting their biggest fuel bargain in years, with gas prices continuing to fall even as oil has stabilised.

At the biggest US gas trading hub, the Henry Hub in Louisiana, spot prices this week dipped to US$3.50 per million British thermal units (btu), their lowest level since Sept 2002. On a thermal equivalency basis, that translates to an oil price of about $21 per barrel. The prevailing price of a barrel of the US benchmark West Texas Intermediate crude is about $50. Canadian gas is even cheaper, recently fetching the equivalent of $16 per barrel of crude at western Canada's main trading hub.

Recent UK gas prices of about £2.70 per million btu on the ICE futures exchange in London equate to a crude oil price of $24 a barrel. While that would previously have mattered only to gas producers and consumers in those particular regions, shock waves from falling gas prices are spreading around the globe, thanks to the biggest expansion of liquefied natural gas (LNG) capacity that the world has seen. From Qatar, to Russia, to Australia, gas exporters are starting up massive facilities for cooling gas and loading it on to supertankers, just as the Asian and European economies that import most LNG are slowing.

That is threatening to convert the regional gas bubbles that have formed since last summer into the first global gas glut. According to industry sources, LNG cargoes that last year would have been snapped up at premium prices by eager buyers in Japan, South Korea or Spain, were now being diverted to the US despite the low gas prices in that market. The US has the world's biggest capacity for storing gas, so it is to those shores that excess LNG from around the world is being directed.

Charif Souki, the chief executive of Cheniere Energy, a company building LNG receiving terminals in the Gulf of Mexico, warned that even the ample US storage network could reach capacity by the end of summer. "Whether we have room for it or not, the LNG is going to try to come to the US," he said. In such an event, tankers could be turned away from their market of last resort, forcing down prices even more. Alternatively, LNG imports could displace US gas production, causing an immediate collapse of domestic gas prices and drilling.

The number of gas rigs working in the US has fallen by 50 per cent since late August, according to the US oilfield services firm Baker Hughes, which tracks drilling activity. John Harpole, the president of Mercator Energy, a Colorado gas consultancy, said US prices could fall to $1.50 per million btu this year in response to rising imports. That would be below the operating costs of about $2.50 per million btu for most LNG production facilities, so could lead to some output being curtailed.

In its short-term energy outlook, released on Tuesday, the US government's Energy Information Administration (EIA) predicted US imports of LNG would increase by 36 per cent this year "because of lower global economic activity and the start-up of new liquefaction capacity in the Middle East and other parts of the world". The agency forecast a 7.4 per cent drop this year in gas consumption by the US industrial sector due to the recession. Total US gas consumption this year would fall 1.8 per cent and remain flat next year, it predicted.

The EIA noted that the 1.67 billion cubic feet of gas in US storage facilities as of April 3 was well above the five-year average for the season. "Working natural gas inventories are projected to rise to possibly new record-high levels by the end of the summer injection season," the EIA said. In the absence of "signs of a dramatic economic recovery", Henry Hub gas prices were likely to remain near their recent level until autumn, it said.