U.S.-UK gas price link looks coincidental, brief

 

Front month natural gas prices in the United States and Britain have converged since early February but any link between them looks tenuous and not yet the dawn of a global market led by shipments of liquefied gas.

Reuters data shows a positive correlation between front month prices on Britain's NBP gas market and the U.S. Henry Hub

since mid-February after years of swinging between periods of positive and negative correlation.

For a graphic please click here: here

Growing global liquefied natural gas LNG.L trade has raised expectations that regional gas pricing areas could converge eventually, as in the oil market.

But the close proximation of prices in the world's two largest and most liquid gas markets does not show that, analysts said, despite traders in Britain increasingly looking at prices across the Atlantic for an indication of how many tankers will sail to its big new import terminals.

"It is certainly getting the industry excited at the moment ... because they are about the same level now" Niall Trimble, director of the Energy Contract Company in London, said.

"But its probably coincidence because if it was genuinely converging you would see significant volumes of LNG moving around the world, particularly into the United States, and right now you have got very small volumes of LNG going in" he said. 

"If they are following each other then its almost certainly because of some sort of informal link to oil."

The correlation between the two gas markets peaked at about +0.74 in mid July, but the UK gas link to U.S. light crude prices passed +0.8 a few days earlier while the U.S. gas price correlation to oil was over +0.91.

PRICE DIP

UK gas prices fell below the United States in mid July, prompting Goldman Sachs to issue a note saying some of the LNG coming to Britain over the last few months because of weak global demand could head west.

British gas prices jumped the next day on expectations among some traders that less LNG might come to Britain in August if the UK price stayed below the U.S. price.

"We all saw and we all see the convergence of the UK and the Henry Hub prices. I think it's a massive influence" said a trader at a major gas producer, a view shared by a trader at a bank in London.

"When there's close parity between the two, if we think that LNG is going to switch between the two markets then, yes, it can definitely have an effect" he said.

But others disputed the idea that UK gas prices dipping below the United States for a short time could divert Britain bound cargoes to the United States.

"We are in a total deadpan area where for the last about two pence difference on the arbitrage has meant nothing and the next two or three pence will mean nothing" a utility trader said. 

"It makes no odds because cargoes aren't going to suddenly divert to the United States because we are a penny below because it's not enough."

Some traders in the UK gas market view the convergence in prices as a sign of LNG's influence. But analysts said the movements in prices over the last few months probably has little to do with it.

"Prices are probably as low as they can go and both markets are sort of moving around close to the bottom" independent LNG consultant Andrew Flower said.

"You could argue that maybe LNG is doing it but I find that difficult to believe... There's not much evidence that LNG is switched between the markets as yet."

NARROW MARGIN

Although prices in Britain hovered above the U.S. in the last two weeks of July on expectations of tight North Sea supply in August, UK front month contracts dropped sharply to around 21.5 pence on Aug 3, making the U.S. more attractive again to LNG sellers with a September gas price offered around 21.67 pence.

But the difference was not big enough to cover shipping costs for crossing the Atlantic, so was unlikely to tempt Britain-bound tankers to divert, analysts said.

Forward market prices for next winter are also still much higher in Britain, with January contract trading on Friday nearly 40 percent higher than the U.S. equivalent, because demand in Britain is still largely driven by heating needs.

GAS DEMAND 

Global gas demand is expected to fall for the first time this year. But there is not as much excess LNG as expected because of problems in some producing countries and slower than expected start ups at new production facilities, or trains, in the world's biggest supplier Qatar.

As more LNG becomes available and in search of a buyer in the Atlantic the link between the two markets could grow stronger.

"As these Qatari trains ramp up there is going to be a lot more LNG out there and I would then expect them to react a little bit" Murray Douglas, an LNG analyst at consultants Wood Mackenzie said of the world's two biggest gas markets.

"I do expect the two markets to become more linked in the sense that you have got more out there, more infrastructure in the UK and the same corporate players in both markets. I would expect that to help build a stronger relationship."