Natural gas will stay cheap, even if Japan needs more of it

March 16, 2011: 11:33 AM ET

The U.S. has a glut of natural gas supplies, so don't expect Japan's crisis to impact domestic prices. If the U.S. takes a new direction on nuclear energy policy, however, prices will likely move higher.

natural gas pricesThe price of natural gas has edged up since the earthquake and tsunami pushed some of Japan's nuclear reactors to the brink of meltdown. Some traders are betting that it will spur a bigger rally globally of natural gas prices, but that probably won't be the case in the U.S. as the domestic market already sits on a glut of the relatively cheap fuel used to power homes and buildings.

Japan has shut down 11 nuclear reactors, and with several plants out of operation, it's widely expected that the East Asian island will need additional supplies of liquefied natural gas and other fuels to generate electricity. Nuclear power provides a quarter of Japan's electricity, and the expectations are that cargoes of LNG from Europe and other parts of the world will re-route to meet additional demands from Japan as it starts recovering from the disaster.

And indeed, spot prices have risen higher since the earthquake. Deutsche Bank says Europe is perhaps most vulnerable because it is increasingly dependent on imports of natural gas. Analysts predict from 5 billion to 12 billion cubic meters a year of LNG supplies could now be diverted away from Europe and into Japan, driving spot prices higher in the region's gas hubs. Deutsche added that it could be a "a game-change for the EU gas market."

We've seen the momentum carry into the U.S. natural gas market, too, where futures have climbed about 2.9% since the day before the earthquake. However, in the near-term at least, America's natural gas will likely remain cheap, says Mary Barcella, global gas director with IHS Global Insight Cambridge Energy Research Associates, a Massachusetts-based consulting company that specializes in energy markets.

When it comes to natural gas, think of the U.S. and the rest of North America as an island of its own. Technological advances and the shale-gas revolution have made the region relatively self-sufficient in producing the fuel and virtually independent of LNG imports. In fact, the U.S. currently imports barely 1 billion cubic feet per day, accounting for less than 2% of domestic supply, according to CLSA Asia-Pacific Markets, a Hong Kong-based brokerage and investment group.

What's more, Barcella says, the U.S. already sits on a vast oversupply of the fuel – she points to the nearly 3,000 gas wells this past winter that have been drilled but have yet to be hooked up to the natural gas supply system.

And it's not as if the U.S. would export the excess supply, since the country lacks the infrastructure to easily liquefy large amounts of the gas to sell abroad. Qatar, Malaysia, Indonesia and Australia are the biggest LNG exporters and will likely fill any void for Japan, CLSA says.

In the long-term, however, the wild card that could send prices higher even in the U.S. is extra scrutiny of nuclear power that could result in more regulations and added costs, says Anuj Sharma, an analyst at Pritchard Capital Partners in Houston. As workers in Japan try to avert a nuclear disaster, many policymakers question nuclear safety. On Monday, for example, the Swiss government officially suspended plans to build nuclear plants. And in the U.S., Senator Joseph Lieberman of Connecticut has called to "to slow things down" on new plants at least until safety is further explored.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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