In the days since Russia’s dispute over Gas erupted (once again) with Ukraine, I have seen a number of traders and commentators wonder why there was no direct response in NYMEX NG.
The answer is easy: North American natural gas is a trapped fossil fuel, and enjoys no obvious arbitrage to the world price of NG. While the USA, Mexico and Canada all have LNG import terminals, they have no export terminals. (Actually, there is a single LNG export terminal in Alaska, but it’s Alaskan supply only and not tied in to US-Mexico-Canada supply).
The result is that the only arbitrage is a slow, and indirect one. And that is, when the world price of NG is much higher than the North American price of NG, very few if any LNG cargoes come to our shores. The only arbitrage that is available, therefore, is between the three North American countries, which keeps the NG price fairly equal here. For example, in the last 18 months Canadian production of NG has fallen quite dramatically, while US NG production has risen strongly. The result is that we are exporting alot of NG north, to Canada.
The price for NG today in the UK is around 8.60. That compares to today’s NYMEX price at around 5.80. If for some reason North American NG was damaged for a time, and we needed to attract LNG cargoes, all North American prices for NG would likely rise together, as Mexico, Canada, and the US competed to attract LNG imports. As it stands now, however, those who invested and built LNG import facilities the past few years have been hurt very badly.
But change is coming. The first LNG export terminal (outside of Alaska) is coming to Kitimat, British Columbia. This will trigger enormous change for all North American NG producers as it will equalize North American NG prices with world prices. For producers like EOG, Chesapeake, XTO, and Devon, I’m sure the change can’t come soon enough.
-Gregor