Short-term 하루 용선료 16만불 찍었다.

[Sea and Dream]

Gas glut good for the US economy

·         Wednesday 21 March 2012, 17:24

·         by David Osler

Kretz: low natural gas prices mitigate inflation and boost job prospects.

LNG shipping to stay tight for 18 months

IN A year in which conventional tankers have at times traded at below operating cost, despite the high prices paid for their cargoes, it is interesting to note that precisely the reverse is true of liquefied natural gas.

The cost of natural gas has collapsed in recent years, with the Henry Hub price down from $15.40 per MMBtu in December 2005 to just $2.30 per MMBtu at the time of writing. This is the lowest price in a decade and has led some energy economists to question whether it is sustainable.

Yet short-term charter rates for LNG carriers peaked at $160,000 per day in recent months, driven by a 12% surge in Japanese gas demand after last year’s earthquake and tsunami shut down nuclear power stations.

More recently they have eased back to the $125,000-$140,000 bracket, although even that can be regarded as high compared to the average of $37,000 seen in 2010, and most predictions suggest that the market will remain tight for at least 18 months.

To understand what is going on, you need to remember that the US is experiencing what some, including Lombard Odier economist Stephanie Kretz, have described as a “gas glut”.

In a recent research note, Ms Kretz argues that while low natural gas prices might make the commodity a poor investment, they confer important benefits on a still-fragile US economy by mitigating inflation and boosting job creation.

Recent price movements can be attributed in part to lower than normal winter temperatures in North America, which reduced home heating demand even as output surged to record highs. With companies needing to draw less gas from storage, inventories have swollen to record highs.

But the principal cause is supply growth due to technological innovations in extraction. While the technique of hydraulic fracturing, popularly known as ‘fracking’, has attracted ample criticism on environmental grounds, it has nevertheless enabled a substantial boost to output from shale formations.

Ms Kretz points to both the Obama administration’s proposal to cap the export of US natural gas and a huge supply-demand gap as reasons to expect no significant upward move in prices any time soon.

However, at a time when the price of petrol at the pumps has risen 24% since January 2010, the impact on the consumer price index has been partly offset by a 12% decline in piped gas prices. Moreover, the oil and gas industry is now providing well over 600,000 jobs, having added 33,300 since December 2009.

In the longer term, Lombard Odier expects demand for natural gas to increase dramatically, first in electricity generation, then going on to replace oil, coal and nuclear energy in many fields.

That is good news for shipping, with the world LNG carrier fleet expected to be fully employed in the years ahead, largely due to rising Asian demand. That makes LNG pretty much the one shipping segment to which bankers will lend freely right now.

Shipyards with the specialist skills required to construct LNG carriers are booked out between now and 2014, although even the new vessels set to come on stream may prove insufficient to meet demand from the many LNG projects in the pipeline.

Pareto Securities estimates that the sector will need an additional 175 vessels by 2020. Fearnley Fonds reckons that at least this many will be required by 2017, rising to 220 if all planned capacity is up and running.

Shantanu Bhushan, a senior research analyst with maritime advisor Drewry, said that despite LNG prices being at historic lows, he does not see any correlation with charter rates, either now or in the immediate future.

“When vessel supply is short, that will defy supply-demand logic,” Mr Bhushan said. “If you do not have any vessels and everyone is looking for a vessel to load their cargoes, then definitely charter rates will go up.

“First and foremost is the demand side for LNG, which is firm and will increase with time. So in the short run, rates will remain firm, based on the demand perspective.

“If, as supposed, Japan reopens its nuclear facilities, then in that scenario the vessel supply would be in surplus. But in the near future that is not going to happen, so what I see is freight rates remaining firm, even during summer.”

Over a longer perspective, as environmental concerns become ever more pressing, there is likely to be a shift from coal and other fossil fuels to LNG. However, the speed with which that will happen may well be constrained by infrastructure.