The Coming Revolution in LNG Pricing

Even if it’s a fossil fuel, natural gas burns cleaner than coal. Even if it has been hardly feasible to transport it long distance and overseas in its natural state, a process to cool it to liquefied natural gas (LNG) was developed in the 19th century, and commercial LNG shipments began more than 50 years ago. Since the first LNG tanker shipped the first commercial LNG cargo from Algeria to the UK in 1964, natural gas has become one of the most traded commodities in the world.

However, the gas trading markets around the globe are still highly regionally segmented with enormous price spreads between the U.S., Europe and Asia due to highly specific and variable factors such as pipelines, shale gas, geography, geopolitics, supply, demand, and shipping costs. Although the size of the gas trading market may be such as to call for a global benchmark price, setting a gas price the way oil has may not even be a medium-team possibility.

The U.S. has its benchmark; gas prices are based on delivery at the Henry Hub in Louisiana. On the New York Mercantile Exchange, the price of natural gas for October delivery is in the range US$2.80-2.90 per million British thermal units.

To put this price into perspective, the World Bank’s Commodity Price Data from early August put the U.S. price for July at US$2.8 per million British thermal units. Whereas Japan’s LNG price was US$6.0 per million British thermal units and Europe’s natural gas price was US$4.5 per million British thermal units.

The U.S. shale gas boom has also helped keep the natural gas prices in North America way lower than in the rest of the world. And the U.S. is on track to becoming a net exporter of the commodity, with a saturated domestic market, which has been the main traditional destination of Canadian gas. Moreover, natural gas output from the Marcellus and Utica shales was averaging 22.63 billion cubic feet per day in August, up 2 percent from July and the most since February’s all-time high of 22.78 billion cubic feet per day.
By : oilprice.com

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