Oil indexation: The virus behind LNG disruptions
The coronavirus pandemic contributed to the global LNG glut, but is far from its sole cause. Oil indexation is increasingly an obstacle to efficiently balancing demand and supply, writes Abache Abreu
The spread of coronavirus across the world has generated an unprecedented global health and economic crisis, and presented the LNG and energy industries with a demand shock like no other in history.
It has severely disrupted global LNG trade flows and fundamentals, derailed project investment plans amid uncertainty over the length and depth of the crisis, and could impact the role gas and LNG may play in clean energy transitions.
But the chronic epidemic destabilizing LNG markets and causing disruptions across supply chains predates the coronavirus outbreak. This virus has been around for much longer, gaining strength over time, and has become particularly disruptive at times of supply and demand shocks.
Oil indexation, which still dominates Asia’s long-term LNG pricing, has not only hindered the ability of buyers to resell unwanted volumes to other end users with appetite for opportunistic purchases when faced with falling demand, high stocks and limited gas storage. It has also made supply less responsive to demand shocks and falling prices.
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