Gas Market Price Convergence May Lead to Global Marketplace

The big question for the gas market in 2017 is whether strong signs of the emergence of a truly global gas market will evolve further, maintains S&P Global Platts, pointing to a large degree of price convergence between regional markets in 2016. Traditional pricing in international gas trade has been based on oil indexation, but the oil price rollercoaster of the last few years, increasing LNG production, and growing competition between LNG and pipeline gas have led to a rethinking of oil indexation. The trend for de-indexation to oil is likely to continue in 2017, the consultancy asserts.

This is illustrated by the emergence of the Japan Korea Marker (JKM) as a regional benchmark for LNG delivered into Japan and Korea. The marked increase in liquidity for swaps based on JKM prices “is indicative of a market need for a pricing mechanism more reflective of the specific supply/demand balance of the gas market, one that offers more effective risk management opportunities.”

Platts forecasts an increase in LNG production in Asia to 127 million metric tons a year in 2017, up 16% on 2016, led by increased capacity in Australia, while commissioning of the world’s first floating LNG plant in Malaysia points to new global opportunities for LNG production. Nevertheless, Asia will continue to be a net LNG importer as demand across the region is forecast to grow 6% to 195 million metric tons a year in 2017. While demand in the large, mature Japanese and Korean markets is likely to remain flat, Platts expects China and India to boost their LNG imports, by 28% and 38%, respectively.

As LNG production capacity continues to expand rapidly, particularly in the U.S. and Australia, Platts forecasts an inevitable global surplus that is expected to last until 2024. Some of this surplus is expected to find buyers across Asia since the region is in structural deficit and pricing conditions remain economically viable. In the U.S., the march toward a globalizing gas market means growing pipeline exports to Mexico and rising LNG exports to Latin America, Asia, and Europe. Platts estimates U.S. gas production will resume its growth and hit 74.7 Bcfd in 2017, up 2.5 Bcfd on 2016, while tighter regional market conditions, thanks to growing export opportunities and stronger domestic demand, should lead to higher prices.

In Europe, the availability of, and growing access to, LNG imports has led to a market share offensive by traditional pipeline suppliers. Russian gas supplies to Europe, which hit an all-time high in 2016, are expected to be strong again in the first months of 2017 as buyers look to max out their take-or-pay volumes ahead of a likely rise in oil-indexed contract prices. Falling domestic European supply from Norway, the United Kingdom, and the Netherlands means a growing supply gap that will need to be lled, mainly by LNG and Russian gas. Moreover, coal-to-gas switching, and the closure of coal- red power plants, should provide a boost to European gas demand.

Ross McCracken, managing editor of Platts Energy Economist, observes, “2016 saw significant price convergence in the gas market, and the strengthening of the JKM toward end-year is likely to prove temporary. The growing surplus of LNG, combined with the desire to burn cleaner fuels, creates positive conditions for coal- to-gas switching in 2017. In turn, this could provide the basis for more sustained growth in world gas demand and eventually another round of investment in the global LNG sector.”

(SOURCE: BPN’s Weekly Propane Newsletter)