While in the short term North American natural gas markets may be weak, they will eventually strengthen and move back closer to oil prices as globalization of the commodity continues to unfold, according to Goldman Sachs & Co. economist David Greely. In the long term, the global trade and pricing of natural gas will be set by Russia, with its 54 Bcf/d of gas production, he said.

Speaking at the LDC Forum Rockies & West conference in Los Angeles last Tuesday, Greely said short-term high inventories of gas in Canada and the United States obscures the problems of inadequate infrastructure and the growing oil-gas integration in the market.

"When we talk about lack of infrastructure and bottlenecks, people tend to think this always drives prices up, but often what we see is that it keeps prices down in certain markets," Greely said. "Natural gas, for example, was one of the first, in our opinion, to go through the integration with the oil markets, and it happened after the 2000-2001 price spike."

With higher oil prices today, the assumption that more money would be spent on technologies to find breakthrough alternative fuels is not coming to pass, Greely said. Most of what the high prices and increased technology are bringing is more ways to save energy and operate more efficiently.

"So by global integration of the energy market, all of these commodities [metals, gas, oil, etc.] are traded on an equivalency basis by Btus as consumers look for the lowest cost unit they can buy," he said. "In the gas market, everything began to globalize as the regional markets became more integrated with fuel oil. And contrary to popular perception, the gas markets were becoming more global a few years before the advent of liquefied natural gas [LNG].

"What we originally saw were a lot of regional gas markets all feeding into the oil complex. In a global market they all began to be linked in that way. This resulted in Asia having all natural gas contracts tied to oil and in Europe, a hybrid where contracts are either oil-based or there is no tie, and the purchases are on the spot market for gas."

Greely said gas has been linked to oil for quite some time now, and Russia has become the dominant player by virtue of its control of more than 20% of the global gas trade. As natural gas becomes more and more of a global market, you have to look more at the global price, and that means keeping an eye on the Russians, he said.

"What we see is Russia acting very much like the swing supplier into the natural gas market in a very natural way with oil-index contracts, and that has kept the market very much linked to oil."

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