For A Million BTU

The price differential for a million btu is blowing out once again, between Global oil and North American natural gas. The extraordinary discount has persisted for some years. But today, with West Texas Intermediate (WTIC) oil above $100 and Brent oil above $110, the spread has reached new highs. The energy content of natural gas is trading at an 83% discount to WTIC Oil, and at an 85% discount to Brent oil. An economist might be persuaded to say: “That is a gap that must eventually close. Or, at the very least, which gives North American energy markets a huge, competitive advantage to source cheap, domestic btu compared to the rest of the world.” I would not disagree. However, the infrastructure problems associated with energy transition do not make such switching from expensive oil to cheap natural gas an easy, or rapid, endeavor. I address these issues continually, but a post of mine from last year, Vexed By Natural Gas, might be worth a read for those who want to ponder the situation further.

As you study the chart below, consider for a moment a less well advertised price spread: the disparity between North American natural gas (which remains landlocked) and the price for landed LNG in the United Kingdom. As energy market observers already know, North American natural gas will—in the next couple of years—be released through LNG export terminals in British Columbia (Kitimat) and Louisiana (Sabine Pass). That will trigger a rather momentous price convergence globally, as world LNG prices adjust to the entry of North American volumes.