Global gas price convergence shows shift to oversupply

[MILAN] The gap between natural gas prices globally has shrunk to its narrowest since 2010, as faltering demand in Asia combined with rising supply across the board aligns benchmarks pulled apart by the US shale boom and Japan's Fukushima nuclear disaster.

The convergence between prices in Asia, the Americas and Europe could mark the end of a period of tightness in gas markets as new liquefied natural gas (LNG) export projects in Australia and the United States start up from next year.

A mild winter and summer this year preserved stockpiles, further capping demand for LNG imports.

Prices for LNG cargoes are trading within a US$2 per million British thermal unit (mmBtu) range globally, the tightest spread since early 2010, said Marcel Boonaert, the head of trading and portfolio at Wingas UK. At its peak, LNG in Asia was trading at US$12/mmBtu above gas at the European benchmark, and around US$5-US$8/mmBtu for South America.

"It shows how the global gas market is tipping away from its previous state of tightness and into glut - what we are witnessing is the emergence of global gas oversupply similar to pre-Fukushima conditions," Mr Boonaert said.

Before 2010, gas prices in the major consuming regions of Asia, Europe and the United States were tightly correlated as the sea-borne trade in LNG linked markets not reachable by pipeline.

But a confluence of technological advances, economic headwinds and natural disasters set prices on divergent paths by reshaping energy markets in each region.

US shale-gas drilling unlocked giant reserves, pushing prices to decade lows of US$2/mmBtu, while Japan's 2011 tsunami wrecked the Fukushima nuclear plant and shuttered the country's atomic fleet, lifting gas demand and sending Asian LNG prices to around US$20/mmBtu. European gas languished in the middle at US$9/mmBtu.

While Henry Hub gas prices remain around US$4/mmBtu, at some LNG import points, such as Cove Point in the country's north-east, prices have risen to US$7.60/mmBtu on cold weather. Asian spot LNG prices currently trade at US$9.50/mmBtu as Japan restarts nuclear reactors, and European prices are slightly higher.

"I'm starting to think we are going back to that pre-Fukushima period. Prices in Asia don't look like they will see a major recovery and the whole world has a lot of LNG stored," a Europe-based LNG trader said.


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