Spot LNG Exports To US & West European Markets From Middle East Increase.

*** A Steadily Growing Shortage Of Tankers Has Limited The Size Of The Market For Spot & Brand LNG; But This Will Not Last Long As The Shipyards Will Be Delivering A Number Of New LNG Carriers In The Next Two/Three Years

The volumes of spot LNG exports from the Persian Gulf and Algeria to the US and West European markets this winter are expected to total between 1.5 million and 2 million tons. Most shipments will be bound for the US East Coast, where spot prices of natural gas are expected to range from $6.80/million BTU to more than $7/m BTU, with gas futures prices at NYMEX already exceeding $7.15/m BTU.

Natural gas pricing for the whole of 2004 in the US is expected to average $6.18/m BTU, the Energy Information Administration (EIA) said in its November short-term outlook report released on Nov. 9. The EIA sees $6.33/m BTU as an average price in the US for the whole of 2005. These prices represent only slight increases from last month's projections by the EIA, the statistical arm of the US Department of Energy.

US distillate stocks, including heating oil and diesel, last week were 17m barrels below the 2003 level, a worry if the winter gets cold. They fell for the eighth week running, the EIA reported on Nov. 10. Temperatures in the big US North-East heating oil market are expected to remain chilly at least for another week. Private forecaster EarthSat said the coming US winter could be 4.5% colder than last year (see OMT of this week).

Export ventures on both sides of Suez are trying to maximise production in order to have surplus LNG for sale on spot basis to markets where the price of natural gas will be high. This is particularly in the US North-East, by far the world's biggest market for heating oil and gas.

The biggest suppliers of US-bound spot LNG in the Gulf are Qatar's two gas liquefaction and export ventures, QatarGas and RasGas. Together they have booked 700,000 tons of LNG for deliveries between late November and mid-February. As in the case of the other suppliers of spot-priced LNG, this volume represents surplus production by the two ventures after meeting contractual commitments to their term customers.

Qatar, home to the world's third-biggest natural gas reserves (proven at more than 900 TCF) next to Russia and Iran, is exporting more than 19.5m t/y of LNG. Export volumes of LNG, methane gas super-cooled to liquid for transport on tankers, are expected to swell by 4.8m t/y by April 2005, when an additional train comes on stream (see Gas Market Trends No. 18).

The BP-led Abu Dhabi Gas Liquefaction Co. (ADGAS) has booked about 300,000 tons of surplus LNG for the US market this winter. The Shell-led Oman LNG has been negotiating a spot deal for between 250,000 and 500,000 tons for winter deliveries to the US, with one or two shipments likely to go to Spain and North-West Europe (NEW).

An APS source at the Algerian state concern Sonatrach says the company may sell one or two shipments to NWE and several other shipments to the US, with the total volume to be between 200,000 and 500,000 tons. He says this will depend on the ability of its plants to produce surplus LNG.

Sonatrach expects repairs to the heavily damaged LNG plant at Skikda to be completed this week, with 3.5m tons/year of capacity to be on stream by end-November. The plant was nearly destroyed by an explosion on Jan. 19. Repair work, including replacement of units and equipment, has been carried out at top speed in view of strong demand for Algerian LNG.

Sonatrach is having a new $800m train with the capacity of 4m tons/year built at Skikda to replace three of the plant's six trains which were destroyed in January. Those trains had a combined capacity of 3m tons/year. The other three trains were partially damaged and repairs were possible.

Spot supplies to the US in this winter are particularly attractive because of strong demand for natural gas and high spot prices, which have been rising sharply since last August. The EIA noted that September spot prices averaged $5.15/m BTU and October prices averaged around $6.54/m BTU. The pricing increased in September and October as the industry responded to production losses in the Gulf of Mexico from Hurricane Ivan in mid-September.

Last August, natural gas futures at NYMEX lost 18% of their value and were at levels not seen since November 2003, while physical gas prices on the Henry Hub fell to less than $5/m BTU in the first week of September (a week before Ivan hit the Gulf of Mexico). By then natural gas prices had fallen by about 30% from their level in May. But a shortage of heating fuels in the US North-East has built up recently and Henry Hub prices of natural gas have risen above $6/m BTU.

From Nov. 8, cold hit the US North-East, causing energy prices to shoot up. The week ended on Friday, Nov. 12, with Henry Hub natural gas futures settling at $5.93/m BTU, down $0.25 (4.05%) from Nov. 11. But the NYMEX Henry Hub futures settled at $7.18/m BTU, down $0.06 (0.83%) from the Nov. 11 contract. The New York City Gate price of natural gas on Nov. 12 was $6.58/m BTU, down $0.16 (2.37%) from Nov. 11.

The futures price of heating oil at NYMEX on Nov. 12 settled at $136.36 per gallon, while NYMEX gasoline closed at $1.25.69/gallon. December WTI closed at $47.32/barrel on Nov. 12. At the IPE in London December Brent on Nov. 12 closed at $42.31/b, while Dated Brent on the spot market traded at $41.37/b.

There has been a reversal of trends between the US and the Far East where spot LNG prices and their link to oil prices were concerned. Until early November, natural gas prices in the US were much lower than the spot LNG prices in the Far East, while the front-month prices of WTI at NYMEX were very high - above $50/b. Several spot LNG shipments bound for the US were diverted to Japan and South Korea. But now spot LNG shipments are being re-routed to the US as Henry Hub, NYMEX and New York prices of natural gas are high while front-month WTI prices are below $50/b.

LNG prices in the Far East are linked to crude oil prices, with about a 3-4 month time lag and some smoothing provisions. Until November, even Nigerian spot LNG bound for the Cove Point terminal on the US East Coast was diverted to the Far East, despite the fact that LNG shipments to the US from Nigeria are about 30 cents/m BTU cheaper, relative to transporting that LNG to the Far East.

In August the spot price of LNG CIF-Japan was as high at $7/m BTU, while the Henry Hub spot price of natural gas was about $5/m BTU. As a result, about 11 BCF of US-bound LNG from the Pacific were re-routed to the Far East in that month - with almost 18 BCF of LNG diverted to Japan and South Korea in September and October.

From Nov. 8, however, high heating oil prices triggered the reversal as low distillate stocks caused natural gas prices to rise sharply. The price surge has been more rapid at NYMEX than on the spot markets in the US because of heavy speculation by huge funds and investment banks (see OMT).

The link of heating oil prices to those of natural gas in the US has begun to be stronger than in the past two decades since late 2000, with the spot price of natural gas in California at one time in early 2001 having risen above $40/m BTU. It is not likely that such a strong link represents a lasting trend, as one of the main factors to this is speculation in energy futures trading.

In its abbreviated report, the EIA sees US demand for natural gas this year at 22.02 TCF, and this will rise to 22.47 TCF in 2005, compared with 23 TCF in 2003 and 21.95 TCF in 2002. Coal demand is expected to increase to 1,106m short tons in 2004 and 1,132m tons in 2005. Total electric power use also is up slightly to 3,735 billion kilowatt hours in 2004 and 3,835 bn kWh in 2005.

According to the EIA, heating oil spending by North-Eastern households will average about 37% above last winter's levels, compared to a previous projection of a 28% rise. Residential heating oil prices averaged $1.88/gallon for October-March. Propane-heated households can expect increased spending of about 26% this winter, compared to a 22% rise seen for next month. Expected spending increases for natural gas-heated households remain the same as last month's projections at about 15%.