Friday, March 11, 2011

The Natural Gas Tsunami

The massive earthquake in Japan overnight has reportedly shut at least four nuclear plants in that country.

Japan already relies on LNG imports for virtually all of its natural gas generation needs. The loss of nuclear supply will result in even more LNG demand from Japan. I have heard early reports that they could end up importing an additional 4 or 5 LNG cargoes a month to make up for the lost generation. That has naturally caused global natural gas prices to rise overnight.

However, anybody who thinks that ANY of this will have ANY impact on supply/demand in the US will be very disappointed.

Historically there are several incidents we can look to for comparison. For example, a number of years ago Japan was forced to shut down several nuclear plants for an extended period for safety reasons. LNG was naturally used to make up the difference. The result was a jump in global natural gas prices and a subsequent rise in US natural gas prices.

The big difference between then and now is that prior to 2008/2009 the US was an importer of LNG to make up the difference between domestic supply and demand. So naturally when global LNG prices rose it had a direct impact on natural gas prices in the US.

Today, however, the US has an abundant supply of natural gas (simply Google "US natural gas shale" to learn why). And the impact of shale gas in the US has pushed prices so far below the rest of the world that the US now imports virtually zero LNG. Not only that, but the US also has virtually zero ability to export LNG.

As a result incidents that impact global natural gas prices have no impact on supply/demand in the US.

If anything, the earthquake in Japan will only serve to increase the spread between US and global natural gas prices. A better way to play this spread would be to invest in a company like Cheniere (LNG, CQP) that is in the process of building LNG export capabilities in the US.

A more immediate play would be to invest in a company like Golar LNG (GLNG) that ships LNG globally.

I am long LNG and GLNG.



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