Why Unrest in Libya Could Be A BOON to Europe's Natural Gas Market

Most investors won't connect the dots between unrest in Libya and higher natural gas prices in Europe.

But those that do are likely to profit from their specialized knowledge.

You see, Libya produces around 2 percent of the world's oil. That's not an insignificant amount, and the supply disruption is spurring headline after headline of 'Welcome back $100 a Barrel Oil' knock-offs.

What's not garnering as much attention in the media, however, is that Libya's natural gas exports have increased significantly in the past few years - especially for natural gas thirsty Europe.

The U.S. Energy Information Administration (EIA) has data showing that since the Greenstream pipeline from Libya to Europe opened in late 2004, Libya's natural gas exports to Italy have doubled.

But Libya halted gas exports to Italy on February 22^nd - that means Europe is short the 25 million cubic meters that used to flow through the Greenstream pipeline every day.

Image courtesy of Eni SpA (NYSE: E)

As this Bloomberg story points out, Europe has another option to replace this natural gas flow - the Russian firm Gazprom (GAZ.BE) can easily replace those volumes because the company is the biggest supplier to Europe.

Here's the rub - increased dependency on natural gas from Gazprom isn't a good thing.

Already, Europe is at the mercy of Russian natural gas. And this dependence means that natural gas prices in Europe are more than twice the price of natural gas here in the United States.

Small Cap Investor PROanalyst Tyler Laundon just crunched some numbers for me. He says that yesterday, the spot price for natural gas trading in the U.S. settled at $3.82 per thousand BTU's (mmBTU).

But in London, spot prices for natural gas prices settled at $8.70 per thousand BTU's (mmBTU). And the futures market there is suggesting that natural gas prices in London could rise by around 18 percent by November of this year.

Pulling 2009 European gas sales from Gazprom's 2010 Databook, and gas consumption from the EIA, it's clear why Europe needs to break its addiction to Russian natural gas.

***In the United States, the most recent energy boom has been in shale gas fields. These include the Barnett, the Fayetteville field in Arkansas, and the Haynesville field at the intersection of Arkansas, Louisiana and Texas.

But the natural gas market has not matured in Europe where natural gas commands a huge premium - current prices are more than double the price of natural gas in the United States.

As I mentioned, this is because many European countries are at the mercy of Russia, and the state controlled firm Gazprom, for their gas supplies.

This single company accounted for 84 percent of Russia's gas production in 2009. Because of Gazprom's dominance in the natural gas market Europe's price is largely dependent on Russian border prices.

Natural gas is not easily transported, so these countries can't simply import supplies from the U.S. to ease the pain.

***I strongly suggest you look into natural gas stocks that are poised to benefit from the likelihood that natural gas prices in Europe will continue to rise. In particular look at those that are exploring for natural gas. A couple companies that I've mentioned before include BNK Petroleum (BKX.TO) and Toreador Resources Corporation TRGL.

For even higher potential gains, I'd suggest micro-cap exploration companies like those featured in this report.

Disclosure: NONE