Liquefied Natural Gas Pricing

Unlike oil, which carries a single global price, the price of natural gas differs across global markets. The mechanism behind the pricing of natural gas is quite complex as varying influencing factors attribute to the changes in the cost of natural gas in different geographical locations.

So what exactly causes these differences in natural gas prices in each region? Several factors impact the pricing of natural gas. For simplicity we shall investigate the pricing schemes present in three of the largest natural gas regional markets - North America, Europe and Asia.

In the US the pricing of natural gas is based on gas prices generated by benchmarks at large terminals such as the Henry Hub in Houston. These gas prices are actually established by the laws of demand and supply and not linked to the price of oil. Therefore at times of high domestic supply of gas simultaneous decreases in price occur. This explains the recent drop in gas prices in the US as vast supplies of shale gas have been discovered there.

Unlike North America, Asia does not have an extensive domestic supply of natural gas. There is a large importation of natural gas in this region. As there is not an abundant domestic supply of natural gas the laws of supply and demand do not influence gas prices in Asia. Natural gas prices are directly and solely related to oil prices as it is seen as a substitute fuel. Thus fluctuations in the price of oil have a positive correlational impact on the price of natural gas- rises in the price of oil cause rises in the price of natural gas (and vice versa).

In Europe the mechanisms at play in the pricing of gas are similar but yet different to those employed in Asia. Rather than the price of gas being solely related to the price of oil, gas prices are indexed to a basket of energy alternatives such as coal, oil, and petroleum products. This results in natural gas prices that are cheaper than Asia (solely indexed to oil prices) and more expensive than those of the US (where there is a vast domestic supply of natural gas).