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The difference between the retail prices being paid in non U.S. markets and the U.S. suggest a more expensive future for U.S. consumers lies ahead.
Even though the price of natural gas futures has risen significantly over the past twelve months, U.S. retail prices are still low compared to what prices in Japan and other countries are. This is because of the way liquified natural gas is being marketed around the world.
The U.S. has a fairly good domestic natural gas supply, while countries such as Japan and South Korea depend on imports of liquified natural gas for much of their fuel. Yet, according to the Wall Street Journal "The fuel heats half of U.S. homes, generates 20% of the country's electricity and is used to make everything from fertilizer to plastic bags. In March, rising natural-gas prices contributed to a higher than expected 1.1% increase in producer prices, according to the Labor Department."
As a result, if overseas demand continues, as it is likely to due to persistently high oil prices, and economic growth, it is possible that U.S. prices will start to rise as global supplies get increasingly tighter.
Indeed, what's happened is that liquified natural gas (LNG), where the gas is "super cooled" and stored in special transport ships, has made it possible for the fuel to be shipped anywhere. And it's that one single development that has led the market toward the highest bidder.
According to the Wall Street Journal, despite natural gas fetching $10 per million BTUs in the U.S. futures markets, liquified natural gas sold to Japan can get as much as $20 per million BTUs. This huge difference is making it difficult for the U.S., which has expanded its LNG terminal capacity, to get imports that would supplement its domestic production, which has been on the rise due to rising demand.
So, the U.S. has a two pronged problem, a "glut" of LNG terminals, and falling natural gas inventories, but few that are willing to sell LNG to the U.S., since they can get more money somewhere else.
Now, there are two problems for the U.S. natural gas supply. In the short term, prices could rise if summer demand moves higher due to hot temperatures. In the longer term, as U.S. natural gas production begins to wane, prices could remain high.
More interesting is that even though LNG prices were expected to remain low due to a rise in LNG transportation and storage infrastructure capacity, what's happened is that some financial alchemy (GULP) has kept prices higher.
As the Journal reports, it's the way that LNG contracts are written that has boosted prices as "Until recently, buyers were in the driver's seat: They were able to strike long-term deals and lock in their costs for many years. A seller like Indonesia, for instance, might have agreed to ship LNG to Japan for 10 years at relatively rigid prices. Today, however, sellers have the clout. They are demanding that contracts be loosened to let them divert their output to markets where prices are higher. (In return they generally agree to share the profits with the customer.)"
In essence, natural gas producers have now seized an opportunity to get the highest possible price for their product, and often use specific situations such as natural disasters, such as droughts and earthquakes, which lead to short term increased demands for LNG in the affected areas, as reasons to boost prices and change delivery destinations.
According to the Journal "When an earthquake last summer forced a massive Japanese nuclear plant to close, utilities there ramped up natural-gas use. Prices soared in Japan, which in turn drove up prices in far-off European countries, including the United Kingdom. This kind of situation can trigger domino effects world-wide. Late last year, the global scramble for scarce LNG worsened as a drought hit Spain, cutting its ability to use hydroelectric power. Spain normally leans on neighboring Algeria and Egypt for LNG imports -- but in February those countries were busy shipping to Japan where prices were twice as high as Spain."
What makes this interesting is that hedge funds in Houston, according to the Journal, are placing long term bets on rising prices in natural gas.
Meanwhile, leading LNG terminal operator Cheniere Energy (NYSE: LNG, below) plunged to another new low on Thursday.
Chart Courtesy of StockCharts.com
Conclusion
Is there a huge long term profit hidden in natural gas? If the Journal article is correct, two things have to happens.
One is that global demand for natural gas has to continue to rise. That seems quite plausible and even likely. The second is that U.S. production, which continues to rise has to plateau or start to fall as demand remains high.
In other words, a Peak Gas scenario has to unfold, if U.S. prices are to rise to the levels paid by countries such as Japan which have no domestic supplies.
More interesting is the thought that the U.S. production doesn't fall for an extended period of time and then the U.S. could become an exporter of LNG. That's an interesting twist to the plot which no one seems to be exploring.
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Technical Summary: |
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Chart Courtesy of StockCharts.com
Attention dollar timers: Dollar Confusion Continues
The U.S. Dollar index is forming a base, which means that it could go lower, higher, or sideways for now. That means that we'll wait to see what happens.
As of 4-1-08, we are in cash in this section. We remain in cash and will do so until we see signs of a trend emerging, up or down for the dollar. Right now it's moving sideways.
Do not sell anything short, even a through mutual fund such as in this model, unless you are willing to take above average risk and can handle volatility without major heartburn.
The Powershares U.S. Dollar fund (UUP) is our vehicles for when the dollar is in a rising trend.
The Powershares U.S. Dollar Bear ETF (UDN) is our vehicle for when the dollar is in a falling trend.
Our trading vehicles for individual currencies are the Rydex Currency Share ETFs, symbols FXE, FXA, FXF, FXY, and FXS. See below for details.
Chart Courtesy of StockCharts.com
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