Oil Price, 22 March 2016
By Global Risk InsightsThe world focused its attention recently on Cheniere and the United States’ first liquid natural gas export. But the more telling story actually lies behind the scenes and stems from the state-controlled Russian corporation Gazprom.
Over the course of the past six months, the company has begun to experiment with what it deems to be a new pricing strategy driven by conventional market forces, in which the company auctions off natural gas in a competitive marketplace.
Gazprom is effectively deviating from their standard pricing convention, whereby the commodity’s price is indexed or linked to oil via a long-term contract. While it is true that this week’s announcement focuses only on a small sub-sector of the company’s clientele — the Baltic States of Lithuania and Latvia — the geopolitical implications are profound.
Impact of the shale boom
Across commodities, the influence of the shale boom has been felt from Riyadh to Moscow, and things aren’t changing any time soon. The United States’ shale boom, coupled with the output of other countries such as Australia, has afforded the United States and other countries the opportunity to now source their natural gas from a more competitive marketplace.
As a result of this increasingly competitive landscape, global prices have converged, as a consumer’s location is no longer as important in dictating the price they receive as it once was.
Ultimately, the influx of producers from the United States and Australia has suppressed the arbitrage opportunities that previously existed based on geography. Countries in the Asia-Pacific region and proximate to Russia are paying a premium.
The tightening of global prices over the past year and a projection through December 2018. Source: Timera Energy
Outside of the overall price convergence, the latest moves by Gazprom are one of the first signs that the geopolitical implications of gas production increases are coming to fruition.
By Global Risk InsightsThe world focused its attention recently on Cheniere and the United States’ first liquid natural gas export. But the more telling story actually lies behind the scenes and stems from the state-controlled Russian corporation Gazprom.
Over the course of the past six months, the company has begun to experiment with what it deems to be a new pricing strategy driven by conventional market forces, in which the company auctions off natural gas in a competitive marketplace.
Gazprom is effectively deviating from their standard pricing convention, whereby the commodity’s price is indexed or linked to oil via a long-term contract. While it is true that this week’s announcement focuses only on a small sub-sector of the company’s clientele — the Baltic States of Lithuania and Latvia — the geopolitical implications are profound.
Impact of the shale boom
Across commodities, the influence of the shale boom has been felt from Riyadh to Moscow, and things aren’t changing any time soon. The United States’ shale boom, coupled with the output of other countries such as Australia, has afforded the United States and other countries the opportunity to now source their natural gas from a more competitive marketplace.
As a result of this increasingly competitive landscape, global prices have converged, as a consumer’s location is no longer as important in dictating the price they receive as it once was.
Ultimately, the influx of producers from the United States and Australia has suppressed the arbitrage opportunities that previously existed based on geography. Countries in the Asia-Pacific region and proximate to Russia are paying a premium.
The tightening of global prices over the past year and a projection through December 2018. Source: Timera Energy
Outside of the overall price convergence, the latest moves by Gazprom are one of the first signs that the geopolitical implications of gas production increases are coming to fruition.
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