Diary of a JSE Stock Operator Edition 5: Natural Gas Windfall Seen in Pricey ICE, Cheap Nymex

(Bloomberg) -- The smartest money in natural gas may get its best trade this year by exploiting the difference between London, where prices are the highest in almost two years, and New York, where the market is cheapest.

Investors should sell natural gas in London and buy contracts in New York for the summer, where prices are ``the lowest in the world,'' Goldman Sachs Group Inc. analysts wrote Jan. 11. The opportunity may become more lucrative because London gas will drop 50 percent to $4.88 per million British thermal units as imports rise and demand slows, said Jason Kenney, an energy analyst at ING Wholesale Banking in Edinburgh.

``Towards the end of the month, gas prices will start to come off,'' said John Fahy, managing director at Eras Ltd. in London, which advises energy producers including the United Arab Emirates. He expects a 50 percent decline in U.K. gas prices, similar to last year.

A drop in London would reduce power costs for consumers across Europe, where natural gas represents about one-third of all energy, estimates BP Plc. It would save money for buyers such as Ineos Group Holdings Plc, the world's third-biggest chemical company, while hurting profit at producers including BP, Exxon Mobil Corp. and Royal Dutch Shell Plc.

U.K. summer natural gas, for delivery in the six months through September this year, fell 1.5 percent to 49.75 pence a therm today, according to broker ICAP Plc. That's equivalent to $9.76 a million British thermal units. A therm is 100,000 Btus.

Exxon, BG

Exxon Mobil and BG Group Plc plan to open two liquefied natural gas terminals in the U.K. capable of increasing the nation's supply 15 percent by the end of the year. Norway's StatoilHydro ASA is working to fix the Kvitebjoern and Ormen Lange gas fields to boost shipments to England.

The end of winter will sap demand. The U.K.'s summer consumption of natural gas bottomed at 169 million cubic meters last year, 61 percent lower than the wintertime peak, data from National Grid Plc show. Average London temperatures of 16.8 degrees Celsius (62.2 Fahrenheit) in June do little to spur need for air conditioning.

Futures traders have wrongly expected London's summertime prices to be higher than New York's before. The last time was in 2002, when gas for June delivery instead plunged 39 percent on the ICE Futures Europe exchange to the equivalent of $1.73 per million British thermal units. Natural gas rose 41 percent to $3.623 on the New York Mercantile Exchange in the same period. A $10 million bet against them made a $4 million profit.

British Benchmark

British prices are the benchmark for Europe, the source of one-third of global gas production for Irving, Texas-based Exxon Mobil, the world's largest oil company, and 30 percent of supplies for The Hague-based Shell, Europe's biggest producer. Lower commodity prices reduce earnings from pumping oil and gas, Exxon's most profitable unit. Exxon made $18.3 billion from exploration and production in the first nine months of 2007, or 63 percent of its total.

Centrica Plc, the U.K.'s biggest energy supplier, benefits when falling gas prices lower the cost of generating power at the Windsor-based company. Winners also include Ineos, of Lyndhurst, England, and the British unit of Terra Industries Inc., a fertilizer maker in Sioux City, Iowa. Gas represents more than half of the raw materials used to make chemicals, according to the American Chemistry Council.

By selling gas in London and buying it in New York, investors can speculate on changes in the value of the two contracts. ICE's natural gas futures for June delivery have never expired at prices above comparable contracts in New York, Bloomberg data show. U.K. contracts, introduced in 1997, are now $1.45 per million British thermal units higher than in New York.

LNG Terminals

U.K. gas is ``overvalued,'' said Sam Shoro, a senior analyst in Sittingbourne, England, at McKinnon and Clarke Ltd., which helps advise energy buyers including Microsoft Corp. As summer approaches, the country will get more gas from Norway and Wales, where the two liquefied natural gas terminals are being completed. The plant from Reading, U.K.-based BG is slated to start imports by June 30, taking in natural gas that's been cooled to a liquid and shipped in tankers.

LNG supplies to the U.S. are declining because Asian and European customers are paying higher prices, according to the U.S. Energy Department. Asian buyers are paying more than $15 per million British thermal units this winter for LNG cargoes, Fahy said.

U.S. LNG imports in December were 0.9 billion cubic feet a day, down 47 percent from 1.7 billion a year earlier, according to Stacy Nieuwoudt, an analyst at Tudor, Pickering, Holt & Co. Securities Inc. of Houston.