But that is all about to change, says the International Energy Agency. The looming surplus in gas supply is set to put pressure on the current market structure, helping gas to break from crude oil and trade independently.
In an unauthorised draft version of its flagship World Energy Outlook report, the rich countries’ watchdog says: “The prospect of a large glut in gas supplies persisting to at least the middle of the 2010s could have a profound impact on gas-pricing mechanisms.” The changes “will be inevitably slow”, but over time the formal link between oil and gas prices could weaken in continental Europe and Asia-Pacific, bringing them closer to North America, where gas trades independently.
“Market reforms in some regions could drive a wider move towards spot trading and gas-price indexation, replacing oil-price indexation,” the draft report says.
The IEA declined to comment.
Gas has long been a substitute for oil in power generation. Given that oil is a highly liquid market, crude has historically served as a benchmark for gas prices.
The opportunity to trade and hedge in a new liquid gas market could represent a bonanza for Wall Street banks such as Morgan Stanley, Goldman Sachs and JPMorgan, which are already big traders of natural gas in North America. It could boost revenues for European banks such as Barclays Capital or Deutsche Bank, already big operators in commodities. A move towards spot prices could also trigger a race to create derivatives contracts, helping exchanges in continental Europe and Asia.
Currently, the price of about 70 per cent of gas traded in Europe and 52 per cent of the gas sold in the Asia-Pacific region is linked to oil prices. By contrast, almost 99 per cent of the gas sold in North America is priced as an independent commodity.
“The record high oil prices up to mid-2008 have put pressure on the formal oil-linkage in long-term contracts,” the draft adds. The linkage produces odd price behaviour.
With oil prices rising towards $80 a barrel, importers in Europe and Asia soon are going to be forced to pay more for their gas in spite of a looming glut.
In the US, the cost of oil has broken apart from gas this year due to rising domestic gas supplies and weak industrial demand.
The cost of West Texas Intermediate, the US oil benchmark, has risen 70 per cent since January, while Henry Hub natural gas, the country’s benchmark, has fallen 22 per cent since the beginning of the year, bringing the divergence between oil and gas prices close to record levels.
Gas exporters are, nonetheless, reluctant to break the oil-gas link. Russia’s state-owned Gazprom and Algeria’s national company Sonatrach fear, the draft says, “a move away from oil-price indexation on the grounds that gas-to-gas competition would be more likely to result in lower gas prices”.
Analysts say that gas exporters will fight to maintain the oil link and keep long-term contracts, on the assumption that revenues will be higher.
While the changes in pricing systems are likely to happen over time, the integration of the regional markets seems more distant. “The North American market may remain largely disconnected from the rest of the world,” the draft says, pointing out that rising domestic supplies are displacing imports of liquefied natural gas.
“A truly global gas market – characterised by strong price linkages between all the main regional markets – is still some way off,” the draft adds.
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