Ever since the United States have begun to exploit unconventional Oil- and Gas resources through „fracking“, Natural Gas prices have started to decouple from oil prices on a significant scale. The discount of natural gas compared to oil is up to 90 % (in a range of 54 to 90 % within the past 5 years). US Natural Gas is up to 90 % cheaper than Oil for 5 years in a row.
Whereas oil is traded at world market prices, natural gas markets are subject to various mechanics and dynamics. On the one side natural gas is traded on market places (in North America nearly 100 %, in Europe nearly 50 %). On the other side there are long-term supply and purchase contracts (in Europe nearly 50 %, in Asia nearly 100 %). The charts above show the development of free market prices in the United States and Europe.
Cheap U.S. natural gas brings European gas market to waver
Although the United States are so far not exporting „cheap“ natural gas to Europe, the US natural gas price already has an indirect effect on the European energy markets. The cheap and clean natural gas is in the process of substituting coal for US electricity production. The „unused“ excess coal is therefore being exported to Europe. In 2013 only Germany has imported 50.6 million tonnes of coal at a value of 4.1 billion Euros (this corresponds to a growth of 15.2 % compared to the previous year).
This cheap and dirty imported coal makes it possible for Europe to produce cheaper electricity compared to using natural gas, which is very often purchased based on long-term supply and purchase contracts with Gazprom at prices above European natural gas spot prices.
For this reason several natural gas power plants have been shut down (at least temporarily) and substituted by coal fired power plants.
The contracts with Gazprom contain pricing formulas which are linked to the oil price. Furthermore these contracts contain clauses regarding guaranteed minimum supply (by Gazprom) and guaranteed minimum purchase quantities (by the buyers).
Since European market prices (ie spot) are already 50 % below the prices resulting from these long-term contracts, European purchasers (eg utilties, distributors) need to sell these excess amounts of „non-sellable“ natural gas resulting from these „minimum purchase obligations“ on spot markets at significant losses.
This selling pressure will continue until a) production of electricity is profitable again b) Gazprom allows its customers to lower the minimum purchase obligations or c) additional demand for natural gas is created. Particularly transport is offering a great opportunity so substitute expensive oil with the cheaper and cleaner alternative, ie natural gas.