LNG Shortages

As reported in a New York Times article, liquefied natural gas (LNG) terminals built in Louisiana are becoming a home to empty supertankers that were expected to be importing LNG from around the world. Shipments of LNG to the U.S. are falling, with the LNG instead going to Spain and Japan, further depleting U.S. stockpiles. Unlike crude oil, natural gas is more of a regional commodity, although its price is connected somewhat to crude oil prices. Historically, crude oil has traded at about a 6-8 multiple to natural gas (or natural gas has traded at a 6-8 times discount to crude oil). Recently, natural gas has not kept up as crude oil continues to climb in price.

Given that competition is increasing for LNG, and since others are willing to pay more for the commodity, the U.S. will continue to get shut out unless changes are made. Due to reduced imports, it is estimated that the U.S. will only have 3.1 trillion cubic feet of natural gas in storage at the end of October, a figure that is almost 1 trillion cubic feet below what is considered full storage. Until the pricing structure in the U.S. becomes competitive with the rest of the world, it is unlikely that storage levels will increase, although the same cannot necessarily be said for natural gas prices. Historically, demand is usually lower in the spring, only to start increasing again in the fall as we enter the winter heating season. This year, natural gas prices have continued to rise through the spring as its price moves with oil, even if not at the same historical multiple. If supply constraints continue we may begin to see natural gas prices continue to rise, even if crude oil prices stay flat or even slightly decrease, as prices move to and stay within historical multiples.