Cry Me a Russian
The situation in the Ukraine is adding to the energy risk premium and killing the Russian ruble. Overnight masked men with guns seized government buildings in the capital of Ukraine’s Crimea and flew the Russian flag. This comes as Russia played war games on the Ukrainian border drawing a sharp warning from the U.S. government that it would be a grave mistake to intervene militarily in Ukraine. Pro-Russian militants sought to establish a front to try to turn back what is a pro-Western revolution brewing in the streets.
The tension is making short positions across the energy complex more shall we say complex. The ace card that Russia holds over the region is its natural gas exports. Traders have to determine whether they can trust Russia’s pledge to keep the gas flowing. Russia supply that the 31% of EU gas imports, 27% of crude oil imports, 24% of EU coal imports, 30% of total EU uranium imports. One reason they might is the threat to their economy.
In the past when Russia played the gas card it caused the EU to actively seek other alternatives costing them money and prestige and harmed their claim to be a reliable supplier. Already the situation in the Ukraine has caused the Russian ruble to weaken to an all-time low against the euro-dollar basket. Dow Jones reported that the ruble lost nearly 0.5%, sliding to its weakest ever level of 42.19 against the euro-dollar basket, the central bank's barometer of the currency market. Against the dollar, the ruble remained beyond the psychologically important mark of 36, hovering at a five-year low of 36.20. Against the euro, the ruble shed 0.3%, pushing the European currency to a record high of 49.42.
In the meantime as the world looks to other countries for supply the recent cold snap in the United States is causing some to lose faith in the U.S. energy Boom. Dow Jones reports that the near doubling of U.S. natural gas prices this winter has damped Asian hopes of buying American gas on the cheap when exports begin in a couple of years. Winter storms and bitter cold in recent week’s boosted demand in the U.S. prices have eased recently, but had surged to more than $6 per million metric British thermal units this month from around $3.70 per mmBtu in late November.
Although seasonal, this price surge has confirmed worries by some Asian gas buyers that much-hyped U.S. gas exports, when they begin, won't be available at prices as low as previously expected. Asian power producers may now be reassessing the share of U.S. gas in their future energy mix, and reconsidering calls for the benchmarking of regional gas prices against the volatile U.S. gas market.”
Yet should Asia fret? Probably not, the truth is that U.S. infrastructure and apathy towards non-heat related demand and unrealistic ideas of what should be stored can adjust. While prices won’t be $3.00, over time as the infrastructure gets into place, prices will still be at a big discount to the prices they are paying.
Dow Jones says that Asian buyers pay around $18 per mmBtu, far above U.S. prices. Spot prices in Asia surged to over $20 per mmBtu recently because of a hard winter. The wide Asia-U.S. price gap, even when long-haul shipping costs are factored in, has attracted the interest of Asian buyers, driven a wave of investment in export-focused North American gas projects and prompted calls for prices in Asia to be based on more factors than just the cost of oil in Japan. "The question is how we can reflect, reasonably, the supply-demand situation of LNG," said Kazu Toyoda, chief executive of Japan's state-backed Institute of Energy Economics. Asian buyers may be able to develop an alternative to the existing pricing mechanism by establishing trading and pricing hubs in places such as Singapore, Shanghai and Tokyo, he said.
Buyers in Asia also want some insulation from wild price moves caused by bad weather. "The recent volatility in Henry Hub has certainly introduced an additional discussion point in the general debate as to how long oil-indexation will be prevalent in Asia, which we say will be sustained for quite some time" said Anthony Barker, general manager of BG Singapore Gas Marketing. Despite its high price now, the fundamentals for importing U.S. gas to Asia remain intact, although the price differential has narrowed. Citi Research forecasts that long-term U.S. gas prices are likely to settle in the mid-$5 range, making the U.S. a competitive LNG exporter.
"U.S. LNG exports are expected to redefine pricing and structure in the global LNG markets," Citi's Anthony Yuen said.
That volatility is a reason that these producers should be embracing the long-term natural gas futures where they can lock in cheap prices decades into the future.