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Beginning of an End for Indexation?
The liquefied natural gas market has been in the state of oversupply since late 2014, resulting in low gas prices. This has prompted LNG traders to reconfigure the market dynamics and the contractual framework between them. Consequently, there is a visible shift from a rigid oil-linked gas price to a flexible gas-on-gas price competition, which has contributed to increased global LNG demand.
A head of the collapse in crude oil prices since mid-2014, there was a significant fall in the spot market prices of natural gas, reconfiguring the dynamics of the liquefied natural gas (LNG) market and contractual frameworks for its trade. The current LNG market is in a state of oversupply from late 2014, with demand from the world’s three largest markets—Japan, Korea and China, accounting for 60% of the global LNG imports—declining in 2015. This trajectory is being concurrently offset by Pakistan, Jordan and Egypt (GIIGNL 2016), in addition to India, which now is the world’s fourth largest importer of LNG. This has prevented the overall LNG demand to fall sharply.
In alignment with increasing demand, the contractual framework for obtaining supplies of LNG is evolving gradually. Consequently, there is a visible shift from a rigid oil-linked gas price to a flexible gas-on-gas price competition, which has contributed to increased global LNG demand. Earlier, such a shift was largely due to high oil prices, which resulted in the oil-linked gas price to increase rapidly. Now it is due to the United States (US), which according to Corbeau and Ledesma (2016), is expected to capture 40% share of the new LNG export capacity.
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