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Regional gas markets to become strongly integrated post-2035

Oil&Gas Materials 26 February 2021 11:36
Regional gas markets to become strongly integrated post-2035

BAKU, Azerbaijan, Feb.26

By Leman Zeynalova – Trend:

Gas prices will continue to be challenged on several fronts, Trend reports citing the Gas Exporting Countries Forum (GECF).

“Volatility will continue due to the investment cycles for LNG, but the increasing globalisation of trade will help to keep inter-regional prices competitive. The challenge of decarbonisation (and carbon taxes) will have an important impact in Europe, which will be the balancing market for LNG. In Asia, demand growth will likely see the continuance of the “Asian premium” through the 2020s,” the organization said in a report.

Spot prices at the end of 2019 were declining because of oversupply, a milder winter in 2019-2020, and large inventories left in place as a result. LNG spot prices experienced a phenomenal decline in the first half of 2020 due to two main factors: the demand destruction imposed by COVID-19 and continued milder weather conditions.

At the beginning of 2020, natural gas prices were decreasing due to the LNG oversupply and reduced demand due to a warmer winter in Europe and Asia, even before the COVID-19 outbreak. As for gas price forecasting, 2020 developments clearly show increasing regional natural gas market integration and price convergence, though at a generally lower level compared to 2019 projections. According to 2020 estimates, the HH price will reach USD3.3/mmBtu in 2030, USD4.1/mmBtu in 2040 and USD4.7/mmBtu in 2050. This compares to forecasts made in 2019, where the projection for HH stood at USD4.1/mmBtu, USD4.8/mmBtu and USD5.3/mmBtu, respectively.

“We project that the structure of the natural gas market over the outlook period will remain largely geographically segmented. As storage capacities grow and gas grids expand, LNG shipments will be increasingly used to eliminate the intra-region, intra-year price arbitrage. Regional gas markets are expected to become strongly integrated post-2035, as the rapid development of LNG capacity, as well as transportation and trading networks, including large-scale export pipeline projects, stimulate market integration,” said GECF/

For the Asian market, it is reasonable to expect that competition in the LNG market will put pressure on an “Asian premium” in the medium-term. Lower prices will intensify gas penetration in Asia, which is expected to be beneficial for natural gas consumption in the long-term.

The European market will remain the residual market for LNG. Still, if pipeline suppliers choose to protect their market share, the ample pipeline capacity will render LNG supplies uncompetitive outside long-term contracts used for supply diversification. Global flexible LNG supplies to Europe will put strong pressure on European gas prices in the medium-term. In Latin America, booming indigenous natural gas production and the short distance for US LNG shipments will keep prices tied to Henry Hub. For Europe, strong price pressure is expected following the introduction of a new phase of the ETS and planned coal and nuclear capacity phase-outs in the 2030s.

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Follow the author on Twitter: @Lyaman_Zeyn

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