The correlation of daily price movements between West Texas Intermediate (WTI) and Brent for the past year was 0.44, indicating a positive connection between these crude oil benchmark prices. Analysts at the U.S. Energy Administration (EIA) point out that this number is typically higher than 0.90, indicating a strong positive relationship. But recent volatility in the spread between WTI and Brent has lowered the number in 2020.
In contrast, the daily gas prices at the U.S. Henry Hub, Asia’s Japan/Korea LNG (JKM), and the UK National Balancing Point (NBP) show little correlation largely because most natural gas is still transported through pipeline systems, though the share of LNG trade is rising consistently.
Cost of transport hamper gas market integrated
Shipping crude oil is comparatively cheap, while the cost of liquefying and transporting natural gas in the form of LNG can, in some cases, cost as much or more than input cost of the natural gas. According to the EIA, these high costs transport costs have hindered natural gas trade in the past and helped to keep regional markets isolated.
Cheaper U.S. LNG, liquified under tolling models, has led to increases in both the number of LNG importers and exporters. More and more natural gas gets traded on a short-term or spot basis, which increased to 34% of volume traded last year, according to U.S. government figures.
Higher spot market liquidity will gradually shift the gas trade way from long-term, oil-linked contract pricing toward more short-term, spot-based transactions which is seen as an enabler of a more integrated global natural gas market. Growing U.S. export capacity contributes to this transition, provided that the volumes of gas production and exports get maintained as economies around the world struggles with a global health crisis and economic recession.
