The Institute for Energy Economics and Financial Analysis (IEEFA) expects the prices of gas and Liquefied Natural Gas (LNG) to endure a period of higher volatility and spikes at higher levels in the near future. In recent years, gas spot prices have remained relatively low and stable because of stability in the gas contract exchange market. The stability of the contract market is on the verge of being disrupted as contract prices begin to reflect lower drilling activity, stalling gas industry investment, and the prolonged financial instability and poor financial health surrounding oil and gas companies globally.

The IEEFA’s expected gas price environment will pose challenging considerations for the gas industry, customers, and gas project investors worldwide. Emerging markets such as Vietnam, Pakistan and Bangladesh, will find the gas price environment difficult to operate in as new LNG projects become increasingly at risk of cancellation because of unaffordable LNG prices. Additionally, those invested in LNG projects may see gas generators become underutilised, whilst gas and electricity customers globally may face substantially higher gas prices.

The IEEFA anticipate this research will be particularly useful for prospective gas buyers and industry stakeholders to ensure they are informed on the current health and direction of the industry. Finally, this research suggests consumers and businesses globally will be faced with higher gas prices and presents an opportunity to reduce consumption of gas energy and consider cheaper, renewable alternatives to gas energy.

1. This research is important for the financial industry to consider as oil and gas are inputs for many industries. If not anticipated and accounted for, this increased volatility in oil and gas prices may put pressure on business costs that use oil or gas as an input. Therefore, it is important for investors, financiers, and insurers to be aware of the industries that rely on oil and gas as inputs and ensure the companies they are involved with are taking necessary precautions to nullify the higher prices and volatility expected in the oil and gas market in 2021.
2. Higher gas prices may dampen economic activity as gas is a key input for transportation. Higher costs of transportation will be felt directly by consumers who drive and businesses that rely on transportation in their supply chain.
3. Higher gas prices are expected to continue as spot prices have increased by a factor of 18 since lows seen six months ago. This is expected to impact gas customers globally in the form of considerably higher prices in comparison to the past three years. These higher gas prices present a chance for consumers and businesses to reduce the reliance on fossil fuels and save energy by considering cheaper, renewable sources of energy instead.
4. A new period of volatility and price hikes likely to start with contract prices as drilling activity has been low, gas industry investment in production and development has stalled, and oil and gas companies continue to experience financial instability and poor financial health around the world.
5. Emerging markets that are looking at Liquefied Natural Gas (LNG) to provide a source of power will be challenged by more volatile and higher prices. Vietnam, Pakistan and Bangladesh have over US$50 billion of proposed gas-fired power projects at risk of being left incomplete or cancelled as a result of unaffordable LNG prices.
6. Onshore gas production will be substantially lower at the beginning of 2021 as the number of operating drill rigs internationally has fallen by 40% in the past year.
7. The world’s top oil and gas companies have written off US$80 billion in recent quarters and profitability at a cash flow level remains at a long-term low. These significant write downs and poor profitability hinder the capacity of oil and gas companies to reinvest and grow production levels. As these supply disruptions continue to occur in top exporting countries, such as the United States, the level of volatility in the price of gas will increase globally.