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Natural Gas Slump Sends LNG Cargoes to Europe: Energy Markets

Natural gas burning on a stove top
A file photograph shows natural gas burning on a stove top in London. Photographer: Suzanne Plunkett/Bloomberg

Natural gas prices in the U.K. are the most expensive relative to New York in almost six months, attracting cargoes of liquefied natural gas across the Atlantic.

The difference between the December futures contracts on the New York Mercantile Exchange and the U.K. Intercontinental Exchange is near its widest since Nov. 18 as excess supplies depress U.S. prices. December gas in New York was at $5.164 per million British thermal units on April 30 compared with $7.16 for the ICE U.K. contract.

“You will see more cargoes going to Europe,” Zach Allen, president of Pan Eurasian Enterprises Inc., a Raleigh, North Carolina-based tracker of LNG shipments, said in a telephone interview. “The benefit of taking gas into Europe, especially the U.K., putting it into storage, and selling that gas forward into the winter market, is over $2 per million Btu.”

Prices fell 30 percent this year, making the fuel the worst-performing energy commodity. Output in the lower 48 states increased 1.6 percent in February from January, amid increased production at shale wells, where rock formations are fractured and injected with water, sand and chemicals to release trapped reserves. Increased supplies in America are encouraging producers to send LNG imports to Europe.

The expansion of the Haynesville shale exploration boosted gas production 5.7 percent to 5.4 billion cubic feet a day in Louisiana. This boosted output in the lower 48 states to rise to an average of 63.85 billion cubic feet a day, the Energy Department said in a monthly report on April 29.

Gas storage in the U.K. is low, Allen said. Storage was 29.8 billion cubic feet as of April 22, about 24 percent of capacity, he said. In the U.S., inventories reached 1.912 trillion cubic feet in the week ended April 23, 19 percent above the five-year average level.

Falling Prices

U.S. gas prices have declined 30 percent this year, making it the second worst performing commodity on the Reuters/Jeffries CRB Index this years, as inventories are replenished faster than average and production estimates rise.

“With weak prices and low demand, U.S. daily re-gasification volumes hit their lowest point in six months at the end of last week,” Martin King, an analyst at FirstEnergy Capital Corp. in Calgary, said in an April 27 report. “More and more LNG has been arriving in the U.K. in the past few weeks.”

LNG shipments to the U.S. probably fell in April from a year earlier as the profit of shipping LNG to Europe rose. At least 15 LNG tankers arrived in U.S. ports in April with total capacity of 2.1 million cubic meters, or 46 billion cubic feet of gas, according to vessel tracking data compiled by Bloomberg.

U.S. Imports

The U.S. imported 2.6 million cubic meters, or 56 billion cubic feet gas in LNG form, in April 2009, according to the U.S. Energy Department.

The U.K. imported 2.8 million cubic meters of LNG in April, up from March’s 2.2 million, according to Allen. In April 2009, U.K. imports were about 900,000 cubic meters.

U.S. LNG imports may reach 1.76 billion cubic feet a day this year, the Energy Department forecast in its monthly Short-Term Energy Outlook on April 6. That’s down from 1.8 billion cubic feet a day the department forecast in March.

“If you have a choice, you’re not going to send a cargo to the U.S.,” said Teri Viswanath, director of commodities research with Credit Suisse Securities USA in Houston.

In other energy markets, crude oil futures climbed 2.9 percent in April for their third consecutive monthly gain.

Oil-Gas Ratio

The price ratio for natural gas and crude oil reached 21.98-to-1 on April 30, the widest since Sept. 11, according to data compiled by Bloomberg. The average ratio over the past five years is about 11.3-to-1.

Crude oil for June delivery rose today as much as 64 cents to $86.79 a barrel on the New York Mercantile Exchange as demand will probably rebound with recovery in the U.S. and world economies. A Commerce Department report showed the U.S. economy expanded at a 3.2 percent annual rate in the first quarter.

Prices in the U.K. and Europe are higher now because a colder-than-normal winter pulled down stockpiles, she said in a telephone interview.

“They are starting in a storage deficit position, whereas in the U.S. we started” the rebuilding season in a surplus, Viswanath said. “We’re seeing a price that’s reflective of those fundamentals.”

LNG shipments totaled 451.9 billion cubic feet in 2009, or about 12 percent of all U.S. imports. Pipeline imports from Canada were 3.26 trillion cubic feet of the 3.75 trillion of outside shipments. LNG represented 8.8 percent of imports in 2008, according to the Energy Department.

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