Amsterdam 29 July 2014 - Atradius Gas Market Outlook: regional gas prices in the world inevitably closer
After decades with little interesting happening, the global natural gas market has shown unprecedented dynamism in the past ten years. This has led to divergent gas prices between regions across the world. But this trend is expected to reverse. The shale gas revolution in the United States and strong growth in international trade of liquefied gas should bring regional prices closer together. according to the Atradius Gas Market Outlook.
Atradius observes that regional prices have rapidly diverged over the past decade. Gas prices in the US have been falling, reflecting the rapidly growing production of gas from shale-beds. Gas prices in Asia, on the other hand, have tripled over the same period and are now by far the highest in the world. This is because Asian gas prices are linked to the price of oil which has surged and gas consumption has grown rapidly as a result of economic development. Europe’s gas prices are partially linked to the price of oil, which explains why they have roughly doubled. But these trends are expected to change.
First, Atradius expects that the US will quickly become self-sufficient in gas and prices will gradually climb. This is a result of the very recent US shale gas revolution which has led to a production surge. Imports have halved, despite the power sector having substituted gas for coal. These developments are likely to last and the US will start exporting liquefied natural gas (LNG) to Asia or Europe. Gas exports are triggered by the price difference between the regions.
Second, Atradius expects prices to remain at current levels in Asia assuming Chinese production rises, US exports develop and the LNG cost can be contained. Demand is growing fast and has triggered a boom of LNG imports as local supplies are unable to keep up with the rise in demand. The surge in demand and the high gas prices have triggered a flurry of investments in LNG facilities, particularly in Australia.
Third, Atradius expects the gas prices in Europe to rise eventually. Focus on environmental issues has led to an EU-wide trading system of carbon emission and a renewable energy policy in Germany. Perversely, the measures have reduced gas consumption in the power sector and encouraged the use of coal: a much more polluting energy source. Whereas gas production is gradually declining, demand may pick up on the back of gradually improving economic conditions. Russia, Europe’s main supplier, is expected to benefit, although commercial and political reasons will push European countries to diversify suppliers. LNG imports, even from the US, might play a role over time.
John Lorié, Atradius Chief Economist: “The shale gas revolution in the US, LNG trade growth and demand surge in Asia are key forces at work. We think US gas prices will gradually climb and Asian prices will remain at current levels. And with some upward pressure on European prices, we see prices in these regions inevitably coming closer, reversing the trend of the past decade and clearly, rising across the board. Over time we expect the cheap energy advantage currently enjoyed by US industry to disappear, and that helps restore the competitive position of European industry. Dependence on Russian gas, moreover, will diminish.”
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