Gas price fall more proof of fuel glut

Crude prices have fallen roughly 16 per cent on international markets from their July 11 peak, but the downturn in energy prices did not start with oil and may not end with it. Since the beginning of the month, the price of US natural gas at Henry Hub in Louisiana the biggest North American gas trading hub has plunged nearly 40 per cent on the New York Mercantile Exchange. These simultaneous price drops for oil and natural gas on the world's most liberalised energy markets are a further sign the global energy balance may be tipping into oversupply.

US natural gas fell from about US$13.50 (Dh49.5) per million British thermal units (btu) at the end of June to $9 yesterday. Although gas prices in North America, which are even more volatile than crude, has occasionally risen above the latest peak during the winter heating season, this year's summer run-up was "extraordinary", said Kieran McNamara, a gas analyst with the Paris-based International Energy Agency.

In the UK, which also has a deregulated energy market, gas prices were at their lowest since late December, Mr Kieran said. They started falling about two weeks ago, and are now about 33 per cent below their recent peak. Gas prices often fall in tandem with oil prices, as many thermal power plants are designed to burn either natural gas or fuel oil, permitting operators to choose the cheaper fuel. But this is not what has been driving British gas prices lower. "We have oversupply in the market and demand is down," Mr Kieran said.

In Europe, where most gas trades under long-term contracts at prices indexed to oil, wholesale gas prices for next winter have fallen by a modest 10 per cent this month. In the US, the evidence for an oversupplied gas market is even more striking, since gas prices there have been retreating for longer than oil. "There has been some oil influence on the price, but gas is not moving to oil-price parity," said Robert Ineson, the senior director of North American gas for the consulting firm Cambridge Energy Research Associates.

Prices for the commodity have slumped in the US as the volumes of gas injected into underground storage in recent weeks has exceeded analysts' forecasts. Mild weather in the southern states, reducing demand for gas to power air conditioners, has allowed gas inventories to build. As a result, gas traders are less willing to pay high premiums on futures contracts for gas to be delivered in winter. US gas production has also been strong, Mr Ineson said, which is another factor weighing on prices.

Mr Kieren said US energy producers had responded to high gas prices by stepping up gas-directed drilling and bringing more "marginal" fields into production. What is less clear is whether such regional gas price movements will have any effect on the global market in liquefied natural gas (LNG), which could have a greater influence on the global energy balance. Mr Ineson thinks this is unlikely. US receipts of LNG cargoes have been exceptionally low this year because Asian and European buyers have been willing to pay substantially higher prices. This has been especially true since a major earthquake knocked out a nuclear power plant in Japan last year, pushing up regional demand for gas to fuel power plants.

With Asian gas demand still high, the geographic disparity in prices bid for LNG cargoes was likely to persist, effectively segregating the North American gas market, Mr Ineson said. Mr Kieren, however, predicted that Henry Hub gas prices at or below $9.50 per million btu would eventually start to erode gas prices on the Asian side of the Pacific. "The Japanese will not be paying as much for LNG as they were," he said.

So far, there is not much evidence of that. Asian LNG purchases continue to rise, putting upwards pressure on prices. In June, Taiwan imported 12 per cent more of the commodity than a year earlier, at a cost of $863 per tonne, up from $519 per tonne, the country' sole LNG buyer, state-owned CPC Corporation, reported. In July, Indonesian officials said Korean Gas had agreed to purchase LNG from the Tangguh gas project in Indonesia at a record price of $20 per million btu. The UAE is also a big LNG supplier to Asia.

In the end, it might be falling oil prices that bring Asian LNG prices down. Japanese buyers, in particular, tend to link prices in LNG contracts to oil prices. Still, oil prices and gas prices do respond to some of the same fundamental drivers, which should eventually lead to global price convergence. In the US, for instance, the deteriorating economy has been weakening demand for both commodities.

Manouchehr Takin, an analyst with the Centre for Global Energy Studies, said global oil demand had been weakening for many months, but crude prices had only recently begun to reflect that. That could mean the whole complex of global energy prices may still have further to fall. @Email:tcarlisle@thenational.ae