Very thoughtful analysis here on one of the drivers of current natural gas volatility (namely, the increasingly global nature of nat gas markets). A few comments for those who don't want to read the full article.. naturalgasintel.com/lng-growth-sai…
1/ For those who know nothing about natural gas markets other than your monthly bill imagine that you're a cucumber farmer. You can sell cukes for $2/lb at the farmers market in Wheaton or $3/lb at the farmers market in Glen Ellyn. Where do you go?
2/ Not a trick question. Obviously Glen Ellyn. Now imagine that you're a natural gas producer and gas sells for $3/MMBtu at the Henry Hub in Louisiana or $8 at a hub in France. Where would you sell?
3/ Or, if you're not feeling very international, would you rather sell where there is a glut of gas in Louisiana or where there is an excess of demand in Chicago?
4/ The answer is the same as the cucumber farmer, except that for natural gas you can't just throw a couple bushels in your trunk and drive your gas to another market. You need pipelines and (if it's international) liquification stations and ships.
5/ For most of our history, US markets have been largely isolated from other countries, other than a bit of cross border flow into Mexico and Canada. We've also had historically cheap gas relative to European markets.
6/ And so lots of gas producers have (understanably) pushed to build LNG export terminals so that they could access those higher price markets.
7/ As those terminals have been built, markets have done what markets do. Cheaper gas going into higher price market drive down prices in those markets. Tighter supply in markets (like the US) have put upward pressure on price and volatility.
8/ We're still a long way from fully international markets. And there are other factors affecting gas prices as well (less snowpack = lower hydro output is a big one, so climate change is a big driver here).
9/ But important to understand that market players ALWAYS want to sell into higher price markets, and when they succeed the expensive markets get cheaper and the cheaper ones get more expensive. Keep watching this space. /fin
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