This winter saw something that made exporters of liquefied natural gas very happy: a more than a 1,000-percent surge in LNG prices on the spot market from a year earlier as a cold spell gripped swathes of Asia. What could make them even happier is the fact this surge has seriously compromised the appeal of spot market deals.
Long-term contracts are reclaiming their territory. Traditionally, natural gas was bought and sold under long-term contracts pegged to the price of crude oil. This benefited sellers when oil was expensive and reduced their income when oil was cheap. In either case, the sellers had long-term secure markets for their gas.
With LNG came the spot market where you could sell a cargo more than once while it was still in the ocean. The increased popularity of LNG gave rise to a dynamic spot market where prices reflected demand and supply much more accurately than long-term oil-linked contracts. Buyers loved the spot market when LNG supply exceeded demand and brought prices to historic lows. Yet they didn’t love it so much last month when a million British thermal units topped $30, from less than $2 in May 2020.
As Reuters’s commentator Clyde Russell noted in a column in late January, the gas world was moving towards a greater preference for spot market deals thanks to the abundant—even excessive availability of LNG. Yet one sudden surge in demand may have been enough to cause some rethinking: after all, long-term contracts do have their advantages, chief among them the guaranteed availability of the commodity.
It is no wonder, then, that one of the world’s biggest producers of liquefied natural gas is grabbing the opportunity to secure its market share. Earlier this month, Qatar’s energy minister warned LNG importers that they would face more price spikes unless they bet on the certainty of long-term contracts.
What’s more, Saad al-Kaabi said, as quoted by the Financial Times, that new LNG supply was going to be tighter now, with U.S. shale oil—and gas—production in survival rather than growth mode and with international energy companies shelving projects amid spending cuts. At least half of LNG projects planned to start in the next few years, al-Kaabi said, were not going to materialize.
“There isn’t a lot of money that will be helping oil and gas companies,” the official told the FT in an interview. “But the pure economics of these projects do not fly any more at low oil prices.”
What flies, however, is the economics of Qatar’s own LNG production expansion plans. Last week, the tiny Gulf nation announced what it called the largest LNG project in the world that will bring its annual production capacity from 77 million tons to 110 million tons by 2025. The expansion will cost Qatar close to $29 billion and will cement its place as the world’s top LNG exporter.
With such plans in place, it makes perfect sense for Qatar to promote the security of long-term supply, since this also means the security of revenues for it as a producer. But with oil prices on the rise and spot market LNG prices falling—March deliveries to north Asia are already below $10 per mmBtu—buyers may start having second thoughts.
In the period between 2016 and 2020, according to Reuters, Asian spot market prices for natural gas were on average 27.2 percent lower than Brent-indexed long-term contract prices. Even so, only a third of the gas that enters Asia is bought on the spot market.
There have been hopes that the lower prices on the spot market would help it mature and make the foundation of an international gas market that is not that closely linked to crude oil. But the lower average price comes with much greater price volatility: 51 percent higher than price volatility in Brent-pegged prices over 2016-2020, according to Reuters.
Volatility is great when the market is in oversupply but not that great when demand surges, as the recent events in Asia once again proved. But there is also another factor working to the advantage of long-term Brent-indexed prices. Storage space for liquefied natural gas is limited. This means that even if importers fill up all the available space in preparation for the winter, it may not be enough to secure the fuel they need for their thermal power plants.
With long-term contracts, on the other hand, you don’t need to worry about storage space because the seller guarantees you deliveries. Brent-indexed long-term contracts have been called archaic, but it looks like they are here to stay, according to analysts.
“If buyers don’t secure long-term deals they will see spikes every winter and they will pay a hefty price,” Qatar’s al-Kaabi said.
“People thought this is a cheap commodity and you can have it whenever you want and nobody wanted long-term contracts,” he added. “[But] one or two shutdowns in Qatar or Australia and you’re dead.”
The way to avoiding death appears to be a single one: long-term contracts. However, the fact that the security of global supply hinges on just two huge producers may—and even should—become a cause for worry, especially in an environment where long-term contracts dominate the market.

Slav first published this article in London-based Oilprice.com