Dharmesh Bhatia
Natural gas traders are awaiting more clarity from the US Weather Models, futures are trading flat and volatility remains low as traders study the latest weather forecasts for any hint of a lingering cold spell.
Some speculators are also looking for early signs of a short-squeeze due to the huge short positions held by traders. US natural gas in storage fell at a rate of less than one-third the five-year average as 2019 ended with unseasonably warm weather across much of the country.
One the inventory front, EIA reports 44 Bcf pull from gas storage stocks for the week ended January 3, versus estimates of 52-53 Bcf. A 44 Bcf withdrawal would be much less than the 94 Bcf pulled in the corresponding week last year as well as the five-year average draw of 184 Bcf.
The oil-to-gas ratio recently reached 30:1, and could increase further as expect average gas prices will fall for a second consecutive year in 2020 to their lowest level in over 10 years.
Over the last five years, that ratio has averaged 19:1, but oil prices have risen in the last year while gas has edged lower. Mild weather and a glut of new supply have held back gas, even as US exports of super-cooled LNG have soared.
On an energy counterpart basis, oil should trade about six times over gas. Gas production rose about 10% in 2019 to a record 92.05 (bcfd), according to the EIA. It is also expected that the pace of growth may fall as energy firms cut spending, but EIA still expects output will rise about 3% in 2020.
A natural gas surplus has pushed global prices so low that US producers may soon have no incentive to export the fuel. Futures show the premiums for European and Asian gas over American prices is vanishing this summer. That may prompt US exporters to forego loading scheduled cargoes of LNG to avoid locking in losses. Forward prices for May at the Japan-Korea marker hub, a key LNG benchmark in Asia, are about $2 per mmBtu above the US Henry Hub rate. In Europe, the arbitrage is still open but under pressure. The premium to Henry Hub is about $1.70 per mmBtu.
Reduced LNG exports from the US could actually ease the global oversupply later in 2020. America’s gas exports have surged to a record amid the nation’s shale boom, stoking a glut already fed by burgeoning supplies from projects in Siberia, Australia and Qatar.
LNG projects continue to ramp up in the US just as global demand is being trimmed by mild temperatures in the northern hemisphere winter. If exports from the US slow, there could be a drop in prices, returning the arbitrage to profitable levels.
(The author is Associate Vice President, FX and Commodities, Emirates NBD)
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