IMF Study Examines Changing Patterns in Global Gas Markets

Gas and oil production—and hence prices—are decoupling in the U.S.

Emerging spot market for gas puts new competitive pressures on gas exporters

Such shifts have important implications for large gas exporters

In the following interview, Jose Gijón (Senior Economist in the IMF’s Middle East and Central Asia Department) and Reinout De Bock (Economist in the IMF’s Monetary and Capital Markets Department) discuss “Will Natural Gas Prices Decouple from Oil Prices across the Pond?” which examines these developments and their possible implications for gas exporters.

IMF Survey online: How has the global gas market evolved in recent years?

Gijón: One major development is that the United States is now completely self sufficient in natural gas. Over the past two decades, U.S. production of unconventional gas—in other words, gas that is more difficult to extract, such as tight gas, coal bed methane, and shale gas—has quadrupled. Thanks to advances in the extraction methods (such as hydraulic fracturing technology and horizontal drilling), U.S. gas producers are now tapping the country’s large reservoirs of unconventional gas.

Globally, a number of factors have also changed how natural gas is traded. The growing liquefied natural gas trade, market liberalization in several countries, and falling transportation costs have lowered barriers between the traditionally segmented markets of Asia, Europe, and North America. And new emerging producers, such as Qatar, have increased global supply and eroded the market share of traditional gas producers.

IMF Survey online: Your research shows that there is now a looser link between oil and gas prices in the United States. What’s the reason for this?

De Bock: Natural gas prices have traditionally been linked to oil prices since natural gas was usually sold via long-term negotiated contracts at prices indexed to the price of oil. In recent years, the shale gas revolution has led to a “decoupling” of oil and natural gas prices—in other words, gas prices no longer rise and fall with oil prices. In the United States, we have seen that this decoupling has been extreme. This has happened because the increase in supply, lower prices, and the deregulation of markets have encouraged the development of a significant “spot market” for gas (that is, a market in which gas is bought and sold for cash and delivered immediately). This spot market has exerted pressure on the traditional oil-indexed market.

IMF Survey...