That's All Right - LNG May Not Join Oil as Global Commodity, But Markets Seem Just Fine With That

In the nearly 60 years since its inception, the LNG industry has changed significantly. Once a market in which cargoes were sold under long-term, point-to-point contracts in dedicated ships, it has evolved into one in which destination flexibility accounts for an increasing share of LNG trade, with more volumes being sold under short- and medium-term contracts. The changes reflect a trend toward the increasing commoditization of LNG, with the similarities between the LNG and crude oil markets becoming apparent. In today’s RBN blog, we look at the differences in how the oil and LNG markets have developed, whether LNG might achieve the same commodity status as oil, and why the major market players may not want LNG to follow the path of its older cousin.

In the case of crude oil, the basic supply structure up to the 1970s had been one where foreign oil companies discovered and developed oil reserves under concessions awarded to them by the host countries that held the oil. This provided the majors with equity volumes of oil, which were fed to their respective refineries. The host nations received income primarily under the tax regimes agreed to by the oil majors, rather than act as sellers of oil on the international market. These profitable, long-term relationships were highly prized by the oil majors, but host nations wanted to gain greater control over their reserves and, following the first oil price crisis in 1972, the industry underwent a de-integration as OPEC nations in particular decided to take control of their produced volumes and the oil majors lost their equity supplies, forcing them to look elsewhere for supply they could control.

The timing of that de-integration was fortuitous in that North Sea oil was discovered in the early 1970s, with the prolific Forties field commencing production in 1975, giving the majors access to the equity oil they wanted. By the mid-1980s the Brent oil market had become established, going on to form the basis for the Brent futures market. The use of Brent pricing as an oil spot market yardstick became commonplace and continues to this day. (For more on Brent’s central place in global oil markets, see Wake Up!)

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