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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Natural Gas Is Now Truly A Global Market

With all the drama around crude oil right now natural gas has moved outside the spotlight but there are some interesting developments there as well, and a lot more positive than what is happening in oil. The natural gas trade is beginning to shape a truly international market.

As LNG trade intensifies, traders are being offered a growing variety of derivative instruments to trade in, Bloomberg’s Mathew Carr, Stephen Stapczynski and Anna Shiryaevskaya wrote this week.

Open interest in the Japan-Korea Marker, or JKM the benchmark for liquefied natural gas delivered in northern Asia, has increased threefold in the past 12 months, Bloomberg’s authors noted, reflecting a boom in the LNG trade but also a flourishing spot market that is driving the internationalization of natural gas trade.

The spot market evolution was a result of the expansion in LNG suppliers. The United States and Australia are perhaps the most prominent but there are also emerging LNG producing and exporting nations in Africa, with Canada also staking a claim in the LNG market. At the same time, more receiving terminals are being built to take in the increased supply, further feeding the evolution of an international gas market.

Almost a third of all LNG trade last year took place on the spot market, Shell said in its latest LNG Outlook. This is encouraging for the internationalization of trade in the commodity, according to analysts who spoke to Bloomberg, and that’s despite the price slump that’s hurt gas producers’ profits and cast a shadow over new liquefaction capacity investment decisions. Related: Oil Prices Rise As Trump Declares National Emergency Over Coronavirus Outbreak

What’s even better for the global natural gas trade is that it is separating itself from crude oil. Even though most of the natural gas trade is done under long-term contracts with prices linked to crude oil benchmarks, the emergence of a vibrant spot market has driven a divergence between oil and gas. This was most recently demonstrated by the fact that the JKM remained largely unchanged this week while oil crashed with a bang, Bloomberg’s authors pointed out.

All this doesn’t mean that this nascent natural gas market is without its problems. The growth in paper trading that suggests a maturing commodity market is certainly a good sign. The price depression, however, is not such a good sign because it is also depressing trade.

Here, LNG had the same fate as oil: the coronavirus that effectively closed China for business, as one industry executive said, affected both the oil and gas trade severely.

"China is effectively closed for business as it relates to long-term contracts right now," says Omar Khayum, chief executive Annova LNG, a project yet to be completed in Texas. 

But it is not just China. There is a global glut of natural gas and even though Shell expected the market to rebalance by next year, it couldn’t anticipate the blow the industry will receive from the COVID-19 epidemic. Related: Uber's Green Competitor Is Riding A $30 Trillion Mega-Trend

The JKM dipped in February amid the worst of the epidemic in China. It has since rebounded but, according to Platts Analytics, the spread of the virus to South Korea and Japan, which together account for almost 33 percent of global LNG demand, puts future demand at risk, too.

This is where the relatively new nature of the gas market becomes evident despite all the progress made thus far. There is no gas OPEC to step in and curb production to prop up prices.

There is an organization of gas exporters. It’s called the Gas Exporting Countries Forum and involves a dozen countries, led by Russia, Qatar, and Iran. The list of members also includes Nigeria—Africa’s top LNG producer—Egypt, which has recently staked a claim in the international gas market with several discoveries, and Libya.

However, this organization has so far made no hint that it is interested in acting in concert to control gas prices. The reason: the international gas market is not as developed as the international oil market, according to analysts. Yet as we saw, thanks to LNG, it is developing and maturing. We might someday see the equivalent of OPEC in gas, and this will be perhaps the clearest indication the international gas market has caught up with the oil market and has become a truly mature global market.

By Irina Slav for Oilprice.com

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  • Mamdouh Salameh on March 14 2020 said:
    A truly international gas market is emerging with gas and LNG gaining a lot of economic and geopolitical importance as the pivot for global energy transition.

    Global demand for natural gas is rising at 5.3% per annum. It is growing faster than other hydrocarbons and also faster than global overall energy demand. A movement to de-commission nuclear power and coal in electricity generation particularly in Japan and Germany and a huge demand from China in addition to environmental concerns are accelerating the global demand for gas.

    There are three huge natural gas and LNG markets in the world, namely, the European Union (EU), the Asia-Pacific region and China.

    China became the world’s top natural gas importer - including LNG and piped gas - in October 2018, overtaking Japan which imports all its gas as LNG. It is set to overtake Japan as the top global LNG importer by 2022.

    There is also a geopolitical dimension to natural gas and LNG. Partly because of natural gas, Russia has emerged as the world’s superpower of energy. It currently accounts for 40% of the EU’s growing gas market and is now headed to also become the largest supplier of natural gas to China enhanced by the recently completed enhanced by the Power of Siberia gas pipeline which will be supplying 38 bcm of gas annually to China for the next 30 years.

    Russia’s supremacy in gas supplies will be further enhanced by the Nord Stream 2 and Turk Stream gas pipelines which will be bringing more Russian gas supplies to the EU under the Baltic and the Black Seas.

    LNG of which Qatar is the largest producer and exporter in the world has enabled it to survive a harsh embargo imposed on it by Saudi-led alliance. Once the embargo is lifted, Qatar LNG supplies will help Saudi Arabia and UAE shift electricity generation from oil and gas currently to gas alone thus playing a major role in the diversification of both Saudi Arabia’s and UAE’s economies.

    The shale gas revolution has also enabled the United States to become a major LNG exporter and has also enabled it to cut CO2 emissions domestically and accelerate a
    shift from coal to gas in electricity generation as well as cancelling any plans to build new nuclear plants.

    And with the recent huge offshore gas discoveries , Egypt is resuming its position as an exporter of gas and also emerging as the energy hub of the Eastern Mediterranean.

    Oil and natural gas will continue to be the core business of the global economy well into the future.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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