From The Wall Street Journal
The rise of the U.S. as a major exporter of liquefied natural gas has helped balance the domestic market amid surging production. It has also connected the price of gas in Louisiana to the weather in China—a development that is adding pressure on already low U.S. prices.
The U.S. gas market, long isolated from global trade, had relied on domestic supply and demand for the heating and power-generation fuel to set prices.
Now, though, enough liquefied natural gas, or LNG, is being shipped overseas that forecasting prices is becoming as complex as calculus. There are smog-battling policy makers in Beijing to consider, as well as nuclear-power plant maintenance schedules in Japan, Chilean weather forecasts and gas inventories in the Netherlands to monitor.
“Our supply and demand balances are increasingly linked to what’s going on in other places in the world,” said Barclays analyst Samuel Phillips. “That quite simply was not the case five years ago, or even really a couple years ago.”
Lately a sharp decline in Asian and European LNG prices is reverberating back to the U.S. market. The Japan Korea Marker, a widely used Asian benchmark, has fallen below $5 per million British thermal units in recent weeks, down from more than $10 before winter.
Asian prices have plunged in response to a warmer-than-expected winter in China and neighboring importers, which resulted in gas that was stockpiled in autumn being available for spring. At less than $5, the Asia price is right around the cost of U.S. gas plus processing and shipping expenses.
U.S. natural-gas futures for May delivery settled at $2.70 per million BTUs on Wednesday. Though processing and shipping costs can vary by exporter and destination, $2 per million BTUs is typical, analysts say.
In Asia, U.S. exports are “basically out of the money,” said Jordan McNiven, an analyst with energy-focused investment bank Tudor, Pickering, Holt & Co. “They’re saying, don’t send us any more LNG, we’re good.”
Some shipments are being steered from the Far East to Europe, where prices have also declined after mild winter weather left local markets unusually well supplied. Diverting more LNG cargoes to Europe risks pushing down prices there as well.
This all has the potential to weigh on already depressed U.S. prices this year, analysts say. LNG export terminals scheduled to come online this year are expected to sop up about half of U.S. production growth. If prices are depressed in major overseas markets, like Europe and China, exporters may delay plans to start liquefying gas. Existing export facilities may take advantage of weak international markets to shut down for maintenance.
“There’s a fairly big wave of LNG projects set to come on this year,” Mr. McNiven said. “Do they take a little bit longer to phase in their production volumes if prices stay this bad?”
Though expectations are for LNG demand to continue to surge around the world, and even outpace supply in coming years, U.S. gas inventories could swell more than expected in the spring and weigh on local prices. Since much of the added U.S. gas output is a byproduct of oil drilling, many domestic producers are unlikely to dial back, given the rise in crude prices.
