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Will Covid-19 End The Oil Indexation Of Gas Prices?

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Share Facebook Twitter Linkedin Reddit Premium Content Will Covid-19 End The Oil Indexation Of Gas Prices? By Tatiana Serova – May 01, 2021, 12:00 PM CDT Join Our Community With a historic drop of 75 bcm in gas consumption, it would be legitimate to say that 2020 has been a turbulent year for natural gas. However, even though successive lockdowns have slapped the gas supply-chains and created uncertainty in an already volatile market, gas has been much more resilient than other fuels during this year. The IEA remains optimistic for its prospects, predicting that gas prices will reach pre-pandemic levels in 2021. And as the world slowly recovers from the crisis, global gas markets will be reshaped in-depth and may witness a moment of change for future price setting patterns. One possible scenario could be the end of oil-indexation of natural gas. 

A Roller Coaster of Gas Prices Beyond the structural decline in demand in 2020, gas markets have been characterized by strong volatility throughout the year, with record-low prices during the summer and then soaring back from December to February 2021. These variations resulted from the high sensitivity of gas prices to external shocks – such as cold snaps, the Suez Canal crisis, or the Covid pandemic – leading to major demand and supply disruptions. 

Let’s look at some examples. As a result of the Texas storm in February, gas spot prices had skyrocketed to $1250/Mmbtu in the middle of February, multiplied by 100 in one week. In a lesser proportion, this surge was visible in China, also hit by a cold snap, with gas prices fluctuating between $2 per Mmbtu in December 2020 and $34 in the middle of February. In these conditions, LNG cargoes mostly went to Asia rather than to Europe, which is considered as the market of last resort for LNG

Related: Goldman: Oil To Hit $80 On Largest Ever Demand Jump

Indeed, Europe currently gets only the LNG surplus that did not meet demand in the Asian “premium” market. And this lower availability of LNG obliged Europe to increase its pipeline imports and take gas from underground storage, which also pushed prices up. In addition, a series of unplanned liquefaction outages and planned maintenance works on the Norwegian pipeline pushed the prices up even further

Home Oil Prices Rig Count Energy Energy-General Oil Prices Crude Oil Heating Oil Gas Prices Natural Gas Coal Company News Interviews Alternative Energy Nuclear Power Solar Energy Hydroelectric Renewable Energy Geothermal Energy Wind Power Fuel Cells Tidal Energy Biofuels Environment Global Warming Oil Spills Geopolitics Africa Asia Europe Indonesia International Middle East North America South America Video Breaking News Premium Articles Community Trade Now My Account Latest Discussions Energy General Oil Stocks & Prices Other Energy Topics Trade Now Get Exclusive Intel All Prices OPEC Blends Canadian Blends U.S. Blends WTI Crude • 20 hours Sell Buy 63.58 -1.43 -2.20% Brent Crude • 17 hours Sell Buy 66.76 -1.29 -1.90% Natural Gas • 20 hours Sell Buy 2.931 +0.020 +0.69% Heating Oil • 20 hours Sell Buy 1.922 -0.040 -2.04% Gasoline • 20 hours 2.076 -0.028 -1.31% Louisiana Light • 3 days 66.95 +1.19 +1.81% Start Trading CFDs Over 2,200 Different Instruments Click Here for 150+ Global Oil Prices Louisiana Light • 3 days 66.95 +1.19 +1.81% Bonny Light • 2 days 64.99 -1.29 -1.95% Opec Basket • 3 days 65.71 +1.18 +1.83% Mars US • 20 hours 63.68 -1.43 -2.20% Gasoline • 20 hours 2.076 -0.028 -1.31% Click Here for 150+ Global Oil Prices

Start Trading CFDs Over 2,200 Different Instruments

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Marine • 2 days 65.40 +0.28 +0.43% Murban • 2 days 65.85 +0.17 +0.26% Iran Heavy • 2 days 61.72 -1.05 -1.67% Basra Light • 2 days 66.07 -1.63 -2.41% Saharan Blend • 2 days 65.45 -1.25 -1.87% Bonny Light • 2 days 64.99 -1.29 -1.95% Start Trading CFDs Over 2,200 Different Instruments Click Here for 150+ Global Oil Prices Bonny Light • 2 days 64.99 -1.29 -1.95% Girassol • 2 days 65.73 -1.51 -2.25% Opec Basket • 3 days 65.71 +1.18 +1.83% Click Here for 150+ Global Oil Prices

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Canadian Crude Index • 2 days 51.92 -1.30 -2.44% Western Canadian Select • 2 days 52.16 +1.15 +2.25% Canadian Condensate • 2 days 64.01 +1.15 +1.83% Premium Synthetic • 2 days 65.41 +1.15 +1.79% Sweet Crude • 2 days 60.86 +1.15 +1.93% Peace Sour • 2 days 59.76 +1.15 +1.96% Start Trading CFDs Over 2,200 Different Instruments Click Here for 150+ Global Oil Prices Peace Sour • 2 days 59.76 +1.15 +1.96% Light Sour Blend • 2 days 60.61 +1.15 +1.93% Syncrude Sweet Premium • 2 days 64.01 +1.15 +1.83% Central Alberta • 2 days 59.76 +1.15 +1.96% Click Here for 150+ Global Oil Prices

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Louisiana Light • 3 days 66.95 +1.19 +1.81% Domestic Swt. @ Cushing • 3 days 61.50 +1.25 +2.07% Giddings • 3 days 55.25 +1.25 +2.31% ANS West Coast • 5 days 66.20 +0.94 +1.44% West Texas Sour • 3 days 58.96 +1.15 +1.99% Eagle Ford • 3 days 62.91 +1.15 +1.86% Start Trading CFDs Over 2,200 Different Instruments Click Here for 150+ Global Oil Prices Eagle Ford • 3 days 62.91 +1.15 +1.86% Oklahoma Sweet • 3 days 61.50 +1.25 +2.07% Kansas Common • 3 days 55.25 +1.25 +2.31% Buena Vista • 3 days 71.35 +1.15 +1.64% Click Here for 150+ Global Oil Prices

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1D 1M 3M 1Y All Charts Products Discussion Headlines 22 hours Angola And Zambia Sign $5 Billion Oil Pipelines Deal 1 day Scientists: Bacteria Could Be Used To Source Copper 1 day Oil Trading Giant Looks To Enter The Permian Through Major Asset Sale 1 day Chesapeake Considering Texas Asset Sale 2 days Shell Raises Dividend As Q1 Earnings Jump On Higher Oil Prices 2 days U.S. Oil Imports From OPEC Plunge To Lowest Since 1973 2 days Mexico’s Private Oil Companies Could Add 700,000 Bpd By 2030 2 days Senate Reinstates Methane Emission Rules For Oil, Gas Industry 3 days Major Chinese Investors Could Buy Stake In Aramco 3 days Oman’s National Oil Firm To Sell Off Assets To Fund $8 Billion In Spending 3 days Brent Crude Loadings Could Stop If Workers Go On Strike In Mid-May 3 days Alberta Wins “Turn Off Oil Taps” Court Battle 3 days Uganda Set To Launch Tenders On Massive Oil Project In December 3 days BP Resumes Buybacks After Q1 Profit Triples 3 days Canada’s Oil Sands In Trouble As COVID Cases Soar 3 days Biden Administration To Provide $8.25 Billion In Grid Improvement Loans 4 days U.S. Oil Inventories Rise Beyond Expectations 4 days Oil Refiners Vs. Biofuels Clash Ends Up In Supreme Court 4 days Pandemic Triggers Worker Shortage At Indian Refiners 4 days Brazil Reports 6% Oil Output Decline In Q1 4 days Tanker Collision Off Major Chinese Hub Causes Million Barrel Oil Spill 5 days OPEC+ Concerned About India’s Oil Demand 5 days Nordic Oil Firm Sells World First Certified Carbon Neutral Oil 5 days Canada Fights To Save Line 5 From Shutdown 5 days Total Forced To Halt $20B Mozambique LNG Project After Militant Attacks 5 days Lawsuit Claims Petrobras Ordered Murder Of Shell Exec And His Wife In 2003 5 days Three Killed In Attack On Oil Tanker Off Syrian Coast 8 days New Court Verdict Imperils Dakota Access Pipeline Again 8 days Houthis Claim Drone Attack On Saudi Aramco Oil Facility 8 days Two-Thirds Of Americans Are Interested In Electric Vehicles 8 days Venezuela Ups Domestic Oil Refining, Hurting Crude Exports 9 days Refiner Valero: U.S. Renewable Diesel Stocks Are Running Low 9 days China Pledges To Start Cutting Coal Consumption In 2026-2030 9 days Africa’s Largest Oil Producer Loses $29B Per Year On Power Outages 9 days Biden’s Aggressive Emissions Target Could Have A Major Impact On U.S. Oil 9 days Iran Exports 500,000 Bpd Despite Sanctions 9 days Mexico Congress Passes Controversial Pro-Pemex Bill 10 days U.S. Cancels All Q2 Oil, Gas Lease Sales 10 days Oilfield Services Giants Optimistic About Drilling Recovery 10 days Gunmen Abduct Oil Workers In Northeast India 4 mintues Texas forced to have rolling brown outs. Not from downed power line , but because the wind energy turbines are frozen. 7 minutes Forecasts for oil stocks. 9 minutes Biden’s $2 trillion Plan for Insfrastructure and Jobs 13 minutes European gas market to 2040 according to Platts Analitics 28 mins GREEN NEW DEAL = BLIZZARD OF LIES 54 mins U.S. Presidential Elections Status – Electoral Votes 3 hours *****5 STAR Article by Irina Slav – “The Ugly Truth About Renewable Power” 2 days Battery storage 30% cheaper than new gas peaker plants, Australian study finds 3 hours Americans are not agreement capable. 2 hours America’s pandemic dead deserve accountability after Birx disclosure 15 hours Joe Biden’s Presidency 2 days New Chinese Coal Plants Equal All those in U.S.A 3 days Сryptocurrency predictions Sell Buy Sell Buy Sell Buy Sell Buy Sell Buy Breaking News: Angola And Zambia Sign $5 Billion Oil Pipelines Deal

Find us on:

Oil Creeps Higher After EIA Data Report Crude oil moved higher today…

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Home Energy Energy-General Tatiana Serova

Tatiana Serova is a freelance journalist and a Masters’ student in International Energy and Journalism. She has experience working in newsrooms and for international organisations…

More Info

Share Facebook Twitter Linkedin Reddit Premium Content Will Covid-19 End The Oil Indexation Of Gas Prices? By Tatiana Serova – May 01, 2021, 12:00 PM CDT Join Our Community With a historic drop of 75 bcm in gas consumption, it would be legitimate to say that 2020 has been a turbulent year for natural gas. However, even though successive lockdowns have slapped the gas supply-chains and created uncertainty in an already volatile market, gas has been much more resilient than other fuels during this year. The IEA remains optimistic for its prospects, predicting that gas prices will reach pre-pandemic levels in 2021. And as the world slowly recovers from the crisis, global gas markets will be reshaped in-depth and may witness a moment of change for future price setting patterns. One possible scenario could be the end of oil-indexation of natural gas. 

A Roller Coaster of Gas Prices Beyond the structural decline in demand in 2020, gas markets have been characterized by strong volatility throughout the year, with record-low prices during the summer and then soaring back from December to February 2021. These variations resulted from the high sensitivity of gas prices to external shocks – such as cold snaps, the Suez Canal crisis, or the Covid pandemic – leading to major demand and supply disruptions. 

Let’s look at some examples. As a result of the Texas storm in February, gas spot prices had skyrocketed to $1250/Mmbtu in the middle of February, multiplied by 100 in one week. In a lesser proportion, this surge was visible in China, also hit by a cold snap, with gas prices fluctuating between $2 per Mmbtu in December 2020 and $34 in the middle of February. In these conditions, LNG cargoes mostly went to Asia rather than to Europe, which is considered as the market of last resort for LNG

Related: Goldman: Oil To Hit $80 On Largest Ever Demand Jump

Indeed, Europe currently gets only the LNG surplus that did not meet demand in the Asian “premium” market. And this lower availability of LNG obliged Europe to increase its pipeline imports and take gas from underground storage, which also pushed prices up. In addition, a series of unplanned liquefaction outages and planned maintenance works on the Norwegian pipeline pushed the prices up even further.

Asia Eyeing Gas Hub Creation 

The reason behind structurally higher prices in Asia compared to other regions lies in their traditional oil indexation of natural gas. But today, the trends of commoditization and globalization of LNG trade are marking a fundamental shift in gas pricing mechanisms. The LNG trade has become more flexible and does no longer lean on long term commitments, hence, LNG contracts will be priced from its own benchmarks, distinct from oil. 

Asia is one of the key regions driving that change. In fact, being one of the regions with most gas consumers in the world, Asia largely lacks pipeline infrastructure, hence preferred LNG (which contracts were linked to oil prices). But this year, it broke the tradition : LNG supplied from Qatar was indexed to oil only at 10 to 11%.  

As such, the Covid-19 crisis revealed the obsolete character of the oil benchmarking of natural gas, and marked a move towards the generalization of gas-on-gas (GOG) hub-based pricing. Indeed, gas prices indexed to oil do not follow the supply and demand patterns of the gas sector, which distorts the market. They are sensitive to changes in oil demand, and do not reflect neither the costs of gas production nor the value customers give to it. The correlation between the Brent index and LNG prices is gradually becoming less and less significant, casting doubt on the relevance of oil as a benchmark. 

But making a hub takes time, and requires to be recognized by other market players and have domestic gas reserves – such as the TTF, created in the Netherlands notably because of the abundance of gas in the Groningen field. India and Singapore have made attempts in this direction, without succeeding for now.

A déjà-vu of LNG indexes convergence?  

As a result of the pandemic, we could imagine a lower spread between indexes, which would make the LNG market more global and price signals more harmonized. This is notably the prediction of the Gas Exporting Countries Forum , hoping to create a global and interconnected gas market with lower price volatility. However, for the United States, this new paradigm of price convergence would result in a change of export strategy: for now, Washington has been taking advantage of low cost domestic gas production and higher international sales prices. 

Such a convergence was already expected due to LNG trade expansion between 2008 and 2014, but it did not happen due to the fact that gas prices were still linked to oil, which remained high. In fact, the spread was even more significant since LNG started to be traded globally. 

In the long run, several additional sources of uncertainty can be identified for natural gas prices. The main one is the move towards less carbon intensive sources, as several EU countries have adopted a “coal to gas” strategy and a nuclear power phase-out, structurally improving demand for natural gas in the long term. The potential inclusion of natural gas in the EU taxonomy and a potential Emissions Trading Scheme (ETS) could also affect prices.

By Tatiana Serova for Oilprice.com

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