Skip to main content

Setting the price

Published by
LNG Industry,

The global gas market has been turned on its head over the past two years. In 1Q14, spot prices for Asian LNG were breaking records with the Platts Japanese-Korean Marker above US$20/million Btu.1 Behind this was a structural divergence across regional gas prices in Asia, Europe and the US, with flexible LNG supply diverted to Asia to cash in on premium prices.

In early 2014, there was a strong market consensus view that higher LNG prices were here to stay. In May 2014, Timera Energy published an article titled ‘Considering an alternative view on global LNG pricing’, which explored the risks of an LNG supply glut and price slump.2 At the time, this view verged on the heretical.

Fast forward to 1Q16 and global gas prices have slumped. Asian and European prices have rapidly converged in a relatively tight range at approximately US$5.50/million Btu – US$7.50/million Btu. US gas prices remain below US$3/million Btu, but the price differential between the US and Europe is gradually being eroded by oversupply. Figure 1 illustrates the magnitude of the fall and convergence of global gas prices across the past two years.

Figure 1. Evolution of key global gas price benchmarks.


Despite current oversupply, LNG supply is set to embark on an unprecedented growth spurt over the next 5 years. After several years of limited growth in new liquefaction capacity, there is significant new supply entering the LNG market. It is less clear, however, whether anticipated Asian demand growth will arrive in a timely fashion to absorb this new supply.

As oversupply in the LNG market has taken hold, the global gas market balance has moved from Asia back towards Europe. European hubs are providing key global price support as a market of last resort for surplus LNG. In other words, European hub prices have become a key benchmark, setting the price of LNG globally. However, how much surplus LNG can Europe absorb without driving hub prices sharply lower?

European hubs in a world of oversupply

The ability of European hubs to absorb LNG is driven primarily by supplier flexibility to ramp down pipeline contract volumes. Supplier ability to reduce volumes is constrained by contractual ‘take or pay’ levels.

At the point that the flexibility to reduce European pipeline contract volumes is exhausted, further LNG imports may cause hub prices to disconnect from oil-indexed contract prices and fall substantially. As prices decline, support comes in the form of coal to gas fuel switching in European power markets, but the ultimate price floor is set by Henry Hub (HH), as was illustrated in 2008 – 2009.

Figure 2 provides a schematic summary of annual supply and demand dynamics in the European gas market. To understand these dynamics, it is important to focus on the key sources of flexible supply that drive price behaviour at the margin where supply and demand intersect. Europe’s predominantly Russian oil-indexed supply contracts have dominated marginal price setting dynamics at European hubs (shown in blue), but as European LNG import volumes increase with new supply (an expansion in the green section of the supply curve), these may push oil-indexed contracts off of the margin.

Figure 2 shows that fuel switching in favour of gas is the key driver of the downward slope of the European gas market demand curve. As ‘price taking’ LNG import volumes increase, they effectively push the European gas market down this demand curve to a lower clearing price, at which gas-fired power stations soak up the surplus LNG. This interaction between pipeline contract flexibility, LNG import volumes and power sector gas demand is set to drive European hub pricing dynamics over the next 2 – 3 years.

Figure 2. Projected European gas market supply and demand balance (2016).


The current global oversupply of LNG increases the importance of the linkage between the European and global gas markets. Europe’s role as a market of last resort for surplus LNG means that European hub prices are a key driver of spot LNG prices globally. In turn, the evolution of oversupply in the global LNG market will have an important influence on European hub price dynamics. So, what are the key factors that are likely to determine the duration and nature of the current period of oversupply?

This article was originally published in the January 2016 issue of LNG Industry. To read the full version of this article, sign in or register for a free trial subscription.

Written by David Stokes, Olly Spinks and Howard Rogers, Timera Energy, UK. Edited from by


  1. ‘Platts JKM™ (Japan Korea Marker) Gas Price Assessment’,
  2. ‘Considering an alternative view on global LNG pricing’, Timera Energy, 12 May 2014.

Read the article online at:

You might also like

LNG Fuel 2020

LNG Fuel 2020

LNG Fuel 2020 is an online conference for professionals in the 'LNG as a marine fuel' sector. Since this is a completely virtual conference, you can join us from anywhere in the world, absolutely free. Register for free today »


Embed article link: (copy the HTML code below):