In the long run — beyond 2010 — oil and natural gas prices should return to parity on a global basis, but the “most important and timely driver” will be the build-out of a global liquefied natural gas (LNG) infrastructure, Raymond James & Associates Inc. energy analysts said. They warned in the short term: “beware North American gas names in 2008.”
Led by analyst J. Marshall Adkins, the Raymond James team reviewed the disconnect in oil and gas price parity in the latest “Stat of the Week.” What they found is that in the short term, the United States has “very limited, if any” ability to switch from crude to natural gas as a fuel source, raising their confidence that oil and U.S. gas prices would not average the typical 7:1 Btu parity in 2008 or 2009.
“There will be many forces that will ultimately lead us back to parity,” but LNG’s build-out will top them all,” the analysts said. “This infrastructure build-out will include regasification terminals, gas pipelines, gas storage and gas-fired consumers in regions other than the United States. For example, we just cannot imagine China being willing to pay two or three times more (per Btu) for energy than the United States. The global gas build-out will happen. It is just a matter of how long it will take to accomplish.”
The Raymond James energy team has consistently argued over the past decade that short-term weather aberrations aside, oil and gas prices in the United States were fundamentally linked at a 7:1 oil-to-gas price ratio, a linkage that generally held true from 1998 through 2007.
“Over the next couple of years, however, we expect to see a longer-lived decoupling between U.S. gas and oil pricing,” Adkins wrote. For Btu parity to exist, “there has to be the ability to switch between fuel sources as the prices dictate. Over the last 12 to 16 months, there has been a decoupling of that relationship. That suggests to us that the industrial and utility consumers that could switch to gas did so over a year ago. In other words, do not look for a U.S. gas demand spike from increased fuel switch to natural gas in the short term.”
Raymond James is forecasting a 2008 oil price of $90/bbl and a natural gas price of $6.50/Mcfe, which equates to a 13.7:1 oil to gas ratio.
“In 2009 we expect that ratio to move even higher to above 14:1,” Adkins said. “The reason for this longer-term (two-year plus) oil to gas price disconnect is due to our expectations for a structurally oversupplied U.S. gas market over the next few years. A surge in unconventional/shale play gas supplies combined with rising global LNG supplies lead us to believe that U.S. natural gas prices will trade substantially lower than normal. This should drive the oil to gas ratio substantially higher than the 7:1 ratio seen over the past decade. The problem should be particularly acute in the summer months when seasonal LNG imports to the U.S. peak…Eventually (2010 to 2012), the rest of the world will develop their natural gas regasification, pipeline and gas storage infrastructure to the point where global oil and natural as prices will relink. As that infrastructure build-out occurs, the global oil to gas price ratios will trend back toward a more sustainable 7:1 price parity.”
As LNG becomes a “more fungible global economy,” Adkins and company said the next 10 years will likely see:
“The bottom line for investors is that we do not believe that oil and U.S. gas prices will be linked to the typical 7:1 Btu price parity ratio over the next few years,” said the Raymond James team. Analysts advised investors to “stay long, get longer oily names and beware North American gas names in 2008. Much longer term (three to five years), gas prices will catch up with oil on a Btu basis and the gassy companies will benefit.”
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