Will Natural Gas be a World Exchange Commodity?

Abstract

The article deals with the evolution of gas industry and the prospects of conversion of natural gas into a world exсhange traded commodity. The prerequisites and restrictions of such a conversion are scrutinized. Currently, the liquefied natural gas (LNG) is becoming a major tool for operational balancing of the short-term swings in demand for gas in different regions of the world. The opportunities for transcontinental price arbitrage are growing. Its further development will lead to the emergence of a stable (adjusted for geopolitical factors) variations in prices in America, Europe and Asia, reflecting the cost of transportation (freight) and liquefaction. Alignment of LNG netback prices in all areas of its delivery will be one of the signs of a full commoditization of the natural gas. Natural gas commoditization in a global scale is supported by the increasing “gas-to-gas competition” pricing mechanism based on short-term trading. At the moment, the Henry Hub serves as a full-fledged indicator of prices for the North American market. Similarly, NBP and TTF send increasingly strong price signals to the European market. At the same time, the role of the only visible Asian spot area – Shanghai stock exchange – is still insignificant. The spot hubs already serve as delivery outlets for execution of gas futures’ contracts and other financial instruments concluded on the key world stock exchanges – New York Mercantile (NYMEX), London Futures (ICE-Futures), Singapore Mercantile Exchange (SMX). These global trading floors are likely to form the infrastructure of future universal system of price indication. Commoditization of natural gas will provide a powerful impetus to a convergence of the markets of pipeline gas and LNG worldwide. The understanding of this perspective, besides the general theoretical interest, is important in terms of assessing the competitiveness of Russian gas in the world natural gas markets in the next decades.