The last time that the chief editor of Energy Metro Desk asked us to predict US natural gas prices was in December of 2008. That month, prompt Henry Hub futures averaged almost $6/mmbtu, and the shale gas revolution hadn’t fully kicked in. Here is the key excerpt from that piece:
“The ramp-up in production is coming from unconventional sources, such as tight gas, shale gas and coalbed methane, which are overpowering the decline in conventional gas production… Since most of the shale gas production is coming from just one formation (Barnett), with six other major formations still largely untapped, the very real potential for a supply glut has emerged… We are ending the year estimating how low prices will need to fall to knock out enough excess gas production.”Tamir Druz and Eric Raleigh, “Not for the Meek in 2008,” The Risk Desk, December 2008
It was only appropriate then that the next time EMD asked us to call the natural gas markets was at the end of last year, right before the start of another revolution in the US energy industry. The US has found something to do with all that excess shale gas, and is about to join the ranks of major global LNG exporters.
Also, during most of last year, buyers for long-term US LNG cargos were lining up, hoping to exploit the structural arbitrage between US LNG FOB prices and DES prices in hubs like Northeast Asia. We observed that the global LNG markets had begun to converge, reducing both longer and shorter term arbitrage opportunities, and making traditional trading strategies like “reloads and reexports from the European continent to Northeast Asia…much fewer and harder to come by…”
As of our last long-term forward price assessment, the CAL ’17 spread between the US-Atlantic (FOB) and Northeast Asia (DES) stood at just $1.60/mmbtu, versus freight costs at $1.80/mmbtu. Shorter term arbs are also closed, and the best evidence of that is the fact that that reload activity this year has plummeted, as projected. Cedigaz estimates that 2015 year-to-date European reloads are down -50% versus 2014.
We look forward to presenting our next global gas market call before the end of this year, which we expect will be quite different from how most market observers are seeing things.
[Please note: A version of the above article should be appearing in Energy Metro Desk.]