An eye on the globe
Mike Zaccardi, CFA, CMT
Utilities are no longer focused on the happenings within our borders. Gone are the days of steady 3% GDP growth and reliable financial operations that were driven by what was going on close to home. Input prices have transitioned from long-term coal contracts to near-term natural gas deals.
What does this mean for utility operators? They must be cognizant of the natural gas market abroad. We all know there is less coal-fired generation across the country and more natural gas being used as a fuel input. What many are not aware of, however, is that natural gas is increasingly a global commodity.
Like crude oil, what happens in Europe & Asia can sometimes be as important as what happens domestically. Liquified natural gas prices have collapsed overseas, leading to a convergence among US, European and Asian LNG prices. An analyst must then factor-in the cost of transport to get that LNG to various consumption areas.
LNG exports from the US to the rest of the world have been on the increase in the last number of years, but now a price convergence and supply glut will likely mean weaker US exports, and perhaps downward pressure on US LNG prices. But the curveball is natural gas production declines as this year progresses. Time will tell how the factors play out. Utility fuel-buyers must now be international energy risk managers.