Global oil markets have stopped being the puppet masters driving European natural gas prices.
Gas is no longer as localized a commodity, only moved relatively short distances through pipelines, and tied to oil in European supply contracts because the fuels competed in power generation.
The chart below shows how the concerns over emerging-market demand and escalating trade wars that this summer affected oil markets were hardly reflected in gas prices. Gas has had its own very specific drivers, including gains in carbon, the need to refill storage sites and power generation demand.
“Gas has become its own market, it is driven by forces which are very distinct from oil,” said Muqsit Ashraf, managing director and global lead for energy for Accenture Strategy. “There’s been a move toward a more globalized gas world, where gas could be moved around more readily, but the substitution link with oil has broken off, so oil and gas are not competing against each other.”
What’s driving European gas prices this summer: Low gas storage levels after cold winter and need to refill Low LNG imports into Europe as most cargoes head to Asia Heatwave-related reduction in coal and nuclear power generation Carbon prices at 10-year high Maintenance and outages at gas pipelines and fields Read a full story on this summer’s gas price rally hereEuropean gas markets started their transformation more than two decades ago with the privatization of British Gas in the 1980s, a boom in infrastructure construction from liquefied natural gas receiving terminals to interconnectors and a regulatory drive to create and promote more transparent and liquid markets. That gave rise to the emergence of trading hubs, of which the Title Transfer Facility in the Netherlands and the National Balancing Point in the U.K. are now the biggest.
That contrasts with the localized markets of the past, where gas and oil competed, not just in power generation but also other sectors such as the petrochemical industry. As gas suppliers needed investments to build longer pipelines and LNG import terminals, they required the assurance that the capital was going to be covered. That’s how oil embedded itself in gas supply contracts, which became a norm for the gas industry.
As gas hubs developed and LNG gained momentum, the share of oil-linked gas supply in Europe fell to less than 30 percent from about 80 percent in 2005, Ashraf said. That proportion will continue to shrink to a minimum some buyers require for security of supply, while the share of gas-to-gas competition expands.
“Gas is competing with gas: piped gas from Russia is competing against piped gas from North Africa, competing against LNG from Qatar, LNG from Nigeria, and soon LNG from the U.S.,” he said. “As volumes and liquidity increase and ability of companies to actively trade and drive the gas-on-gas competition also increases.”