BY CONTINUING TO USE THIS SITE, YOU ARE AGREEING TO OUR USE OF COOKIES. REVIEW OUR PRIVACY & COOKIE NOTICE
X
Skip Navigation LinksHome|News & Analysis|News Features|News Feature Detail

Print

World gas prices reflect regional splits


Wholesale spot prices in Asia, Europe and North America are moving further apart this winter, not converging.


A globalized market for a commodity exists when the prices in each region vary to reflect price movements elsewhere, allowing for the cost of transport, seasonal differences, and so on.


Given the strong link between energy prices and the rising cargo mobility, this range of prices is surprising.


But that is not the case now with gas (see chart). Cargoes are moving long distances in response to high prices, but there is not enough volume moving to satisfy demand in one region, or to starve another and so bring prices back into equilibrium.


And the markets in the three traditional regions are still structured very differently. Japan paid top dollar for February cargoes of liquefied natural gas, with trades as high as $19/MMBtu, but India is not far behind: taking into account the shorter distance from producers in south Asia, it could be paying parity for the cargoes.


By contrast, in the highly competitive and well-stocked winter gas market in the US, futures contracts for gas are in retreat, with February trading at $7.00/MMBtu at the Henry Hub.


And in Europe, the market is somewhere between the two extremes. February ranged from a low of $9.891/MMBtu in northwest Germany (BEB hub), to a high of $11.34/MBtu in Italy, according to Platts' assessments.


Given the strong link between energy prices and the rising cargo mobility, this range of prices is surprising.


While Asia has managed to limit the influence of extreme oil prices through the S-curve mechanism in its long-term contracts, there is no such safeguard in the spot market.


High demand means high prices, even above oil parity, and in monopoly markets, captive customers have no choice but to pay up, all along the chain.


This has drawn cargoes from as far west as the Atlantic basin.


Price variation


Why do prices vary so widely? The US gas market has been asserting its independence from other energy sources, especially from oil, over the past few years.


Many industrial users are moving away from gas, or are closing down as the economics are so poor.


Nevertheless, there have been occasions between Decemebr 2007 and January 2008 where spot deliveries to the northeast, such as demand-heavy New York which is within reach of LNG import terminals, fetched close to $20/MMBtu.


Algonquin cash forward-month prices, a proxy for the northeast, have been much more attractive for risk-taking sellers than Henry Hub over the last six months or so.


Owners of LNG cargoes coming into the Everett LNG import terminal would be looking at those prices, rather than prices in Louisiana, the home of Henry Hub, according to US consultant Benjamin Schlesinger.


But the arrival of tankers can depress prices, he said, and the northeast rise is seasonal. Summer prices can give the opposite result, where a heatwave in Louisiana can see the spot price double.


And in Europe, which remains a series of largely distinct markets that are still controlled by a handful of importers, mostly reliant on oil and product price indexation but with a lag, it is still the highly competitive UK that is most exposed to price volatility arising from sometimes quite minor supply and demand mismatches.


The marginal therm sets the spot price, but German and Italian importers are better cushioned from that by virtue of their long-term contracts than the UK, where a variety of hedging tools takes the place of contractual terms.


As of Feb 5 in the UK, no third parties have taken advantage of spare LNG berthing spots slots at the Isle of Grain LNG terminal, and inefficiencies of this nature, arising at least partly from the practicalities of moving relatively small amounts of energy slowly around the globe in response to fast-moving prices, inhibit the move towards a global market.


Asia


Spot LNG prices in Asia leapt by around $2/MMBtu in late December 2007 to the $19/MMBtu mark, with Japan paying those levels in deals for January-arrival cargoes.


Most market players were puzzled by the $2/MMBtu leap in prices during the 2007 year-end lull.


Some shipments were transacted at slightly below $19/MMBtu while others fetched above that level, with the result that $19/MMBtu has become the latest marker for spot winter sales into Asia, he added.


Most market players were puzzled by the $2/MMBtu leap in prices during the 2007 year-end lull, but agreed in general that $19/MMBtu was the new benchmark.


Supplies are tight globally while demand from Asia is strong, lending firm support to prices, a trader observed. There are some buyers in Japan experiencing nuclear power plant problems and they are "really motivated" to secure winter spot shipments, he added.


At $19/MMBtu to Asia, a producer in Trinidad & Tobago, for example, would see a netback price of above $16/MMBtu, with freight cost to Asia in the $2-$2.50/MMBtu range, another trader estimated.


But it would only take four days to take a tanker to Everett from Trinidad, compared with over three weeks' voyage to Korea or Japan - when gas is lost through boil-off, on top of the cost of tying up a vessel for so long.


Such high netback values for Trinidad compare extremely favorably with sales to US markets, which would fetch a FOB price of just $6-plus/MMBtu, with US Henry Hub gas prices in the region of $7/MMBtu, the trader added. Other Atlantic Basin producers such as Algeria and Nigeria would also benefit similarly by diverting shipments to Asia, he said.


However, as peak demand passes though and March nears, prices for LNG in Asia are beginning to weaken. Buyers in Japan have now secured most of their February and some March spot LNG requirements, so the urgency has receded, traders observed.


While demand for further March cargoes is healthy, buyers in North Asia are indicating interest for additional March cargoes at a lower level of around $15-16/MMBtu, traders said.


Similarly, sellers were quoting a lower March price expectation in the range of $17-18/MMBtu, although offers to divert spot Atlantic Basin shipments to Asia are not plentiful at the moment. "We should be able to get deals done in the $16-17/MMBtu level" a trader speculated. However, no March spot deal has yet been reported so far.


Next page: Oil parity is broken


Created: February 5, 2008


Return to top






Copyright © 2017 S&P Global Platts, a division of S&P Global. All rights reserved.