Liquefied natural gas prices linked to the price of crude oil under long-term supply contracts have been on a theoretic roller-coaster over the past four years, though levels reached now signal a new phase as factors outside the LNG market have again influenced prices.
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A large portion of contracts are still at least partially indexed to the price of oil, though some have top and bottom price stops which limit huge rises and big falls.
However, the oil market continues to be a crucial indicator for LNG and unlike other markets oil-linkage in long-term LNG contracts are not influenced by supply and demand - once the contracts are signed.
On the other hand, the LNG spot market has been much influenced by the surging output on the US Gulf Coast and from Australia over the past three years and for two of those years there was high heating demand from colder weather in the Northern Hemisphere winter.
Falling oil prices between late 2014 and mid-2016 had led to a drop in traditionally oil-linked prices in Europe and Asia, but a recovery beginning in caused a turnaround.
From an average of over $100 per barrel for North Sea Brent crude in the first eight months of 2014, prices fell rapidly to an average low of $44/bbl in 2016, but then rebounded to a peak of $81/bbl in September 2018.
Short-lived
This was short-lived, however, with Brent subsequently dropping to an average of $62/bbl in the fourth quarter of that year and where it remained for much of 2019.
Brent crude oil prices averaged $32/bbl in March 2020, a decrease of $24/bbl from the average in February 2020 and the lowest monthly average since January 2016.
Given that most oil-indexed contracts have a three-month to six-month time lag against the oil price, Asian term import prices followed the rise in oil prices throughout most of 2018 and into 2019.
The average contracted Japanese import price rose from $8.36/MMBtu in January 2018 to a high of $10.70/MMBtu in December, though this began to decline slowly in 2019.
Most other LNG-related prices such as spot and regional values followed an upward trend two years ago, influenced by rising oil prices and strong LNG demand in Asia.
Now with the oil price at around $33/bbl after the crude price slump oil-linked contract prices have reached theoretic lows of around $6 per MMBtu.
North Asia spot
North Asian spot LNG cargo prices have also dropped from an average $9.90 per MMBtu just over two years ago to under $3.00 per MMBtu.
The most recent Japan-Korea Marker spot price for May 2020 cargoes was $2.850 per MMBtu.
Spot LNG cargo prices first showed some signs of weakness towards the end of 2018, as a milder winter in Asia and Europe, coupled with the continued ramp-up of new supply, started to place downward pressure on the market.
“Average Northeast Asian spot prices fell by 18 percent between November 2018 and January 2019,” said a report from the International Gas Union.
In Europe, wholesale gas is sold mainly via long-term contracts. These contracts make use of gas hub-based or oil-linked pricing, and often use both.
European spot prices were on the up two years ago, but both the Dutch Title Transfer facility (TTF) and the UK National Balancing Point (NBP) prices have reached recent lows of under $2.00 per MMBtu, though were last at $2.30 per MMBtu and $2.10 per MMBtu respectively.
NBP at $9.45
After hitting a peak of $9.54/MMBtu in September 2018 - over 50 percent higher than its level in the previous year - the NBP has gradually dropped through all levels after still being as high as $7.45 just over a year ago.
The IGU noted that as new liquefaction capacity was added in in the US and elsewhere, prices began to fall further, particularly during traditional seasonal lulls in demand in the Northern Hemisphere spring and summer months.
Natural gas prices in North America are largely set at liquid trading hubs, the largest and most important of which is Henry Hub in Louisiana.
In Asia and many emerging markets without established and liquid gas trading markets, the price of LNG is for the most part set via oil-linkages, supplemented by a smaller, though growing share of spot imports.
Analysts now note that the delivered costs of US LNG provides an increasingly important reference point for global markets, given the flexibility of its destination-free supply as well as the liquidity and pricing transparency of the US market.
For most of 2019, LNG oil-linked prices were at around $9.20 per MMBtu and remained so into 2020.
US cargoes
Over recent years, Asian buyers have increasingly sought to diversify the pricing structures of their LNG portfolios, shifting away from the traditional fixed-destination, long-term, oil-linked LNG contract.
The sustained growth of shale gas production in North America has seen Henry Hub trade at a discount to other major gas benchmarks in the Pacific Basin and Europe.
This prompted Japanese, South Korean, Indian, and Indonesian companies, among others, to sign several offtake agreements based on Henry Hub linkage.
Gas price movements in North America are driven more by overall gas supply-demand market fundamentals than by changes in the oil price.
After briefly dropping at the beginning of 2018 as the market left the peak winter months, Henry Hub prices climbed steadily through 2018,before falling back in 2019 as natural gas production grew.
More downward price pressure at Henry Hub will come from removing infrastructure constraints over time in the US Marcellus and Utica shale basins and for associated gas in the Permian Basin, opening supply to the market.
In addition, end-market fuel competition with coal and renewables in the power sector will provide an upside limit.
Lower oil prices may have decreased the spread between oil-linked and US LNG contracts in the near-term, but the lower starting point of US prices and abundant resources mean that US LNG contracts may offer buyers reduced price volatility through the mid-2020s and beyond.
