The spread between the U.S. Henry Hub natural gas price and the United Kingdom's (UK) benchmark NBP gas price marker has widened in 2010 compared to 2009 and the futures market forward prices show that spread could more than double in 2011. But Barclays Capital believes that the upward projections for the UK market are overblown and will correct. The investment bank is predicting a $1.52/MMBtu spread for 2011, not far off this year's spread so far.
The volume of liquefied natural gas (LNG) imported into the United States will depend on how that spread plays out. The basis spread between the two markets averaged $0.78 in 2009 and $1.32 through Oct. 5 in 2010. Higher NBP prices and a wider spread would draw LNG away from U.S. markets, while a more modest price difference would allocate resources in the Atlantic Basin more evenly.
Currently the spread between Henry Hub futures and NBP futures is much wider, running between the $3.50s and $3.70s in the last week, with the market's forward curve showing a $3.43/MMBtu average spread in 2011.
"Our projections for the Nymex Henry Hub and NBP prices suggest that the NBP-Henry Hub differential has run too far, on both a prompt and forward basis," Barclays said. The investment bank's report bases its prediction of a $1.52 spread for 2011 on a U.S. Henry Hub average of $4.10 and an NBP price equivalent to $5.62.
Barclays doesn't see much downside risk to U.S. prices, which have been driven down in a bearish market. Rather NBP prices have been on a bullish path sparked by adverse weather patterns and predictions of increased gas-fired power demand and industrial demand. But the NBP market may be overplaying the demand growth side of the equation.
"Much as in 2010 global LNG markets should feature bountiful supply in 2011," Barclays says, noting two new Qatari mega-liquefaction trains starting operation in late 2010 and early 2011 and Australia also adding an LNG production facility. That adds up to almost 3 Bcf/d of new supply in the world market while the case is not as strong for demand growth.
"While supply hiccups are not to be ruled out, the Atlantic Basin should be well supplied next year, with the risks skewed toward oversupply," the Barclays report says.
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