In a less spectacular fashion than oil, international natural gas prices have fallen. The explanation goes far beyond low demand related to the COVID-19 pandemic or demand in general. It relies on a much larger and more complicated array of factors that include supply and demand and oil pricing. Disentangling those various considerations can be helpful when trying to assess future developments in natural gas trade.
In the past, international trade in natural gas was based on mostly pipeline transportation from a limited number of regional, often dominant, suppliers. LNG was expensive and would be shipped only to areas where pipelines were difficult or impossible to build. Given a lack of competitiveness, pricing gas has been a challenge. Thus, even though it is no real alternative to gas, oil and its price has become a reference point (oil-indexing).
This changed in recent years. Thanks to technological advances and lower costs of extraction (unconventional gas and hydrofracturing) and liquefaction, international oil and natural gas pricing has experienced significant decoupling. Natural gas is in the process of transforming to a more global commodity.
We see an increasing portion of trade not indexed to oil but to competitive pricing set by natural gas hubs such as TTF (Title Transfer Facility), NBP (National Balancing), JKM (Japan-Korea Marker), or HH (Henry Hub). In addition, traditional long-term (three or four decades even) contracts are often replaced by short or medium-term contracts or by spot purchases. A steadily increasing number of suppliers draws on different types of gas resources (from traditional ones to unconventional shale or coalbed methane) which adds complexity to cost and price formation.
