Liquefied natural gas (LNG) is playing a huge role in the transition to a low-carbon world but it is also rapidly becoming a global commodity as its price crumbles on the open market. The problem for the industry is a structural change that may lead to even lower natural gas prices in the future.
In our latest paper Navigating the transformation of the gas market, from Strategy&, we predict four forces that will weigh heavily on gas prices going forward making the market much more volatile, and risky:
- The thirst for natural gas will continue rising. Although some slowdown in demand growth is expected as global economic conditions soften, particularly in China, LNG orders are not going to decline anytime soon.
- Oil prices will continue to have an impact. If oil prices stay low, so will gas prices. Existing contracts linked to oil will have to be worked through first, but even if oil and gas are delinked after these contracts are concluded, inexpensive oil could psychologically have a dampening effect on all energy prices.
- LNG oversupply will exacerbate commoditisation. The global LNG market is about to become inundated with new suppliers. A supply glut is forecast to continue and oversupply will force sellers to seek alternative markets and share more risk with traders hoping to exploit arbitrage opportunities. Some producers will likely cut prices to defend market share against LNG imports.
- Increased trading volumes on natural gas hubs. The presence of LNG hubs and the increase in available natural gas supplies have attracted new buyers from afar. This evolution in global trading is producing more natural gas liquidity, price transparency, longer-term forward contracts, and gas-on-gas competition, which ultimately reduce contractual risk and facilitate hedging. By globalizing the LNG market, these hubs could increase commoditization.