NATURAL GAS: Widening Oil-Gas Price Gap Positive for Gas Cos

At a time when global crude oil prices continue to stay high above $100 per barrel, the price of its hydrocarbon sibling natural gas is actually coming down steadily. US Henry Hub prices, which are considered the benchmark prices the world over, have fallen to below $4 per million British thermal units (MMBTU).
In the past one year, crude oil prices have gained more than 25% on NYMEX to $100 per barrel level. However, natural gas prices are down 28% to $3.93 per MMBTU. This is mainly as a result of natural gas production rising faster than consumption, thanks to the advent of shale gas. In fact, the US is also likely to slow down its gas imports. The country, which was importing around 8.9 trillion BTU of natural gas every day from Canada in 2010, is expected to import only 8.4 trillion BTU in 2011. Even the LNG imports, which are relatively small at around 1.2 trillion BTU per day, are likely to stagnate.
Natural gas prices are likely to remain benign even for the entire cur-rent year, according to Energy Information Administration (EIA) of the US Department of Energy. The EIA projects natural gas spot prices to average $4.1 per MMBTU in 2011, down 6.6% from last year, and anticipate some recovery only next year. “The EIA expects the natural gas market to begin to tighten in 2012, with the Henry Hub spot price increasing to an average of $4.58 per MMBTU,” its latest short-term energy outlook mentioned.
A barrel of crude oil is equivalent to 5.8 MMBTU, meaning the ratio of oil price to natural gas price should be around 1:6. However, the ratio today has come down to somewhere around 1:25. Unfortunately, this trend doesn’t apply to the liquefied natural gas industry, which is full of several long-term bipartite contracts that link gas prices to oil. Considering that oil prices are expected to stay around $100 in 2011, the wide gap between these competing fuels is unlikely to narrow down in near future. It will, however, provide an impetus for a fast shift towards cheaper natural gas. Domestic natural gas players will stand to benefit from this trend.