With all the drama around crude oil right now natural gas has moved outside the spotlight but there are some interesting developments there as well, and a lot more positive than what is happening in oil. The natural gas trade is beginning to shape a truly international market.
As LNG trade intensifies, traders are being offered a growing variety of derivative instruments to trade in, Bloomberg’s Mathew Carr, Stephen Stapczynski and Anna Shiryaevskaya wrote this week.
Open interest in the Japan-Korea Marker, or JKM the benchmark for liquefied natural gas delivered in northern Asia, has increased threefold in the past 12 months, Bloomberg’s authors noted, reflecting a boom in the LNG trade but also a flourishing spot market that is driving the internationalization of natural gas trade.
The spot market evolution was a result of the expansion in LNG suppliers. The United States and Australia are perhaps the most prominent but there are also emerging LNG producing and exporting nations in Africa, with Canada also staking a claim in the LNG market. At the same time, more receiving terminals are being built to take in the increased supply, further feeding the evolution of an international gas market.
Almost a third of all LNG trade last year took place on the spot market, Shell said in its latest LNG Outlook. This is encouraging for the internationalization of trade in the commodity, according to analysts who spoke to Bloomberg, and that’s despite the price slump that’s hurt gas producers’ profits and cast a shadow over new liquefaction capacity investment decisions.
What’s even better for the global natural gas trade is that it is separating itself from crude oil. Even though most of the natural gas trade is done under long-term contracts with prices linked to crude oil benchmarks, the emergence of a vibrant spot market has driven a divergence between oil and gas. This was most recently demonstrated by the fact that the JKM remained largely unchanged this week while oil crashed with a bang, Bloomberg’s authors pointed out.
All this doesn’t mean that this nascent natural gas market is without its problems. The growth in paper trading that suggests a maturing commodity market is certainly a good sign. The price depression, however, is not such a good sign because it is also depressing trade.
Here, LNG had the same fate as oil: the coronavirus that effectively closed China for business, as one industry executive said, affected both the oil and gas trade severely.
“China is effectively closed for business as it relates to long-term contracts right now,” says Omar Khayum, chief executive Annova LNG, a project yet to be completed in Texas.
But it is not just China. There is a global glut of natural gas and even though Shell expected the market to rebalance by next year, it couldn’t anticipate the blow the industry will receive from the COVID-19 epidemic.
The JKM dipped in February amid the worst of the epidemic in China. It has since rebounded but, according to Platts Analytics, the spread of the virus to South Korea and Japan, which together account for almost 33 percent of global LNG demand, puts future demand at risk, too.
This is where the relatively new nature of the gas market becomes evident despite all the progress made thus far. There is no gas OPEC to step in and curb production to prop up prices.
There is an organization of gas exporters. It’s called the Gas Exporting Countries Forum and involves a dozen countries, led by Russia, Qatar, and Iran. The list of members also includes Nigeria—Africa’s top LNG producer—Egypt, which has recently staked a claim in the international gas market with several discoveries, and Libya.
However, this organization has so far made no hint that it is interested in acting in concert to control gas prices. The reason: the international gas market is not as developed as the international oil market, according to analysts. Yet as we saw, thanks to LNG, it is developing and maturing. We might someday see the equivalent of OPEC in gas, and this will be perhaps the clearest indication the international gas market has caught up with the oil market and has become a truly mature global market.