Natural Gas Markets

Why natural gas, unlike oil, has long had separate regional prices, and how shipping gas as a liquid is changing that.

Natural gas is a fossil fuel made mostly of methane. It heats homes, generates electricity, powers factories and is a key ingredient in fertiliser. Economically, gas behaves differently from oil for one simple reason: it is a gas. It takes up far more space than oil for the same amount of energy, which makes it expensive to move. That single physical fact explains a great deal about how gas markets work.

Pipelines tie buyers to sellers

Most natural gas has traditionally travelled through a pipeline, a network of large steel pipes that can run for thousands of kilometres. Pipelines are enormously expensive to build, and once built they connect a particular seller to a particular set of buyers. That creates a close, long-lasting relationship. The seller needs the buyer to keep taking gas to pay off the pipeline, and the buyer depends on the seller for supply. For this reason, gas has often been sold through a long-term contract, sometimes lasting twenty years or more, with prices set by a formula rather than by daily trading.

Liquefied natural gas opens up trade

The alternative is liquefied natural gas, usually shortened to LNG. Gas is cooled to about minus 162 degrees Celsius, at which point it turns into a liquid and shrinks to roughly one six-hundredth of its original volume. It can then be loaded onto specially built ships and sent anywhere with an import terminal, where it is warmed back into gas. LNG costs a lot, because it needs liquefaction plants, special tankers and regasification terminals. But it frees buyers and sellers from being locked to one pipeline, and it has turned gas into a much more global product. Countries including Qatar, Australia and the United States are major LNG exporters, while Japan, China, South Korea and India are major importers.

Why regions pay different prices

Because gas is costly to move, each major region has long had its own regional price. North America’s benchmark is Henry Hub, a pipeline hub in Louisiana. Europe relies on hubs such as the Dutch TTF, and Asian LNG buyers watch a benchmark for deliveries to north-east Asia. When gas is plentiful in one region and scarce in another, the gap between these prices can be very large. LNG ships tend to sail towards whichever market is paying the most, which slowly pulls prices closer together, but shipping costs and limited terminal space mean the gaps never fully disappear.

Europe's gas shock of 2022

Before 2022, Europe received a large share of its gas through pipelines from Russia. When those flows were sharply reduced after Russia's invasion of Ukraine, European buyers had to replace them quickly, mainly by bidding for LNG cargoes on the world market. European gas prices rose to many times their usual level for a period, and some cargoes that might have gone to Asia were redirected to Europe. Countries such as Pakistan and Bangladesh, which also depend on LNG imports, found themselves outbid and faced shortages. One region's crisis spread across the world through the LNG market.

Gas as a flexible fuel

Gas power plants can be started up and ramped up fairly quickly, which makes gas useful for meeting sudden peaks in electricity demand and for filling gaps when wind and solar output drops. That flexibility often makes gas the fuel that sets the price of electricity at busy times, which is why gas prices can spill directly into household power bills.

Assuming gas has one world price like oil

Because oil trades as one global market, people often assume gas does too. In fact, gas prices in North America, Europe and Asia can differ widely at the same moment, because moving gas between continents is slow and costly. Always ask which region a gas price refers to.

Key takeaways

Natural gas is bulky and expensive to move, which shapes how its markets work.
Pipelines tie specific buyers and sellers together, often through long-term contracts.
Liquefied natural gas can be shipped worldwide, making gas trade more global.
Major regions have their own gas benchmarks, and prices between them can differ widely.
Gas is a flexible fuel for power plants, so gas prices often feed into electricity prices.