Trump's Mexican Standoff May Send US Gas to $2 If Exports End

(Bloomberg) -- Natural gas prices in the U.S. may tumble about 40 percent if President Donald Trump’s diplomatic showdown with Mexico becomes an all-out trade war.

Prices could slide to $2 per million British thermal units or lower if U.S. gas exports to Mexico by pipeline are halted, according to Tudor Pickering Holt & Co. and Again Capital LLC. While analysts with those companies don’t anticipate a complete cutoff, they’re watching closely for signs of any disruption to the shipments, which accounted for as much as 5 percent of U.S. production of the fuel last year.

Trump’s push to impose a 20 percent tax on imports from Mexico to pay for a border wall is threatening to reverse a shift toward stronger alliances between the U.S. and its southern neighbor. The nations’ economies have become increasingly intertwined as crude oil and gas from U.S. shale basins flow south to feed power plants and factories in newly-deregulated Mexican energy markets.

“You could easily talk about dropping to the $2 area for sure or below that,” John Kilduff, partner at Again Capital LLC in New York, said in a telephone interview Monday. He sees a 40 percent chance of a trade war occurring.

The U.S. is sending a record amount of gas south of the border, with exports via pipeline topping 4 billion cubic feet a day in August through October, based on the most recent data from the U.S. Energy Information Administration. Mexico also became the largest importer of liquefied natural gas from its northern neighbor, receiving eleven cargoes from Cheniere Energy Inc.’s Sabine Pass terminal in Louisiana since early August, according to ship tracking data compiled by Bloomberg.

The energy links between the countries are poised to deepen, with pipeline flows set to rise by almost a billion cubic feet a day this year, Alex Tertzakian, an analyst with Energy Aspects Ltd. in London, said by e-mail Monday. Pipeline projects including Energy Transfer Partners LP’s San Elizario Crossing are seen boosting export capacity by 4 billion cubic feet a day in the first half of the year.

Even without a trade war, the Trump administration’s promised overhaul of trade and economic ties could hurt the U.S. gas industry by slowing Mexico’s gross domestic product growth, James Brick, principal analyst of North American gas with Wood Mackenzie Ltd. in Houston, said in a phone interview Tuesday. 

U.S. gas prices would slide by about a dollar if all pipeline exports to Mexico are stopped, leaving the U.S. market awash in supply and forcing drillers to cut production, said Brandon Blossman, managing director at Tudor Pickering in Houston.

“It’s certainly a question mark, but I don’t think investors believe it will happen,” Blossman said. “Exports going away would be a big surprise to the market. It would be a struggle to understand who would win if that trade didn’t continue.”

To contact the reporter on this story: Naureen S. Malik in New York at nmalik28@bloomberg.net To contact the editors responsible for this story: Lynn Doan at ldoan6@bloomberg.net Christine Buurma, Jim Efstathiou Jr.

Copyright 2017 Bloomberg News.

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