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Low Oil Price Impact on Gas Market

Low Oil Price Impact on Gas Market
(Sunday, June 5, 2016) 12:12

TEHRAN, May 03 (Shana) -- Gas market is currently experiencing more fluctuations and stagnation than the oil market. This stagnation is likely to continue in the mid-term.

  • Gas market is currently experiencing more fluctuations and stagnation than the oil market. This stagnation is likely to continue in the mid-term. Unlike oil market where stagnation or prosperity conditions could prove effective in the short term (as oil prices were cut by more than a half in 18 months), due to structural differences in trade and transactions gas market developments are slow but long-term. Therefore, for whatsoever reason the gas market plunges into stagnation getting out of such conditions will be difficult and this issue is related to the nature of gas trade.

    Throughout all stages of production, trade and consumption of gas, the trend of changes is slow but based on long-term equations. Gas transaction contracts are long-term and formulas designed for gas pricing are to be used at long-term periods. Gas transmission projects through pipeline or liquefied natural gas (LNG) are also for long-term because of the big volume of investments and economic and financial planning by exporters, buyers and even the countries whose territory is used as transit land.

    Such conditions are at times some sort of guarantee for both sellers and buyers of gas in the face of fluctuations and loss-producing for buyers when prices fall and for sellers when prices increase. However, it can be said that the trading of any commodity has its own balance mechanism which is worked out based on variables.

    The impact of oil price fall on gas market can now be analyzed. Clearly, the decline in oil prices does not affect the price of gas cargoes which are currently transferred through pipeline or in the form of LNG. The reason is that the gas price is oil-indexed and is set based on long-term formulas and mechanisms; therefore other developments are not effective as long as the deal is in force. This issue has been taken into consideration in the new gas deals, and sellers and buyers incorporate some sort of flexibility in the deals mainly based on oil price fluctuations. However, these methods apply to one-year or two-year contracts. In this method, the average gas price is set based on a criterion like the oil price. It goes without saying that the price of the day is not the only factor and a group of variables and parameters like investment costs, duration of the contract and even political and security factors and changes in regional and global affairs and bilateral relations are taken into consideration. When the gas price is set for one year the oil prices during that 12-month period are taken into account as a decisive parameter.

    However, oil price fluctuations could not remain ineffective on the gas market and gas price. This impact may not be immediate and does not show any sign in the short term, but it will come to bold relief in three to five years.

    First of all, the oil price as the energy index price in the world affects oil investment projects as much as it affects the quantity and quality of projects under study for gas transmission. In fact, when oil prices are low motivation for investment in gas transmission projects is weakened.

    The decline in investment on the one hand, and mid-term growing demand on the other, affect gas prices in the future. The price envisaged in the current gas transmission contracts are set low psychologically due to low oil prices for contracts that will take effect in the future. Therefore, one may conclude that under the present circumstances in which oil prices are low, studying and implementing gas transmission projects are slowed down and investments in this sector are likely to plunge into stagnation. In the contracts signed for gas delivery under conditions of low oil prices, the gas price is set low. Under such circumstances, some countries like Iran may not be willing to sign any contracts for gas exports to some regions like Europe; therefore such contracts are unlikely to be signed under the present conditions.

    Such contracts become effective normally under conditions of balanced prices that would satisfy both sellers and buyers and would be considered as economical (due to high investment costs in gas transmission projects).

    By Ali-Reza Soltani, senior energy expert

    Courtesy of Iran Petroleum Monthly

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