Global Gas Market: Towards New Equilibria

The global gas market is undergoing a profound transformation, marked by a reconfiguration of trade flows on a worldwide scale. The two most relevant dynamics are:

• the gradual reduction — and likely complete interruption — of pipeline gas flows from Russia to Europe, alongside the corresponding increase in flows from Russia to China;
• the growing expansion of international liquefied natural gas (LNG) trade.

From a product perspective, pipeline gas and LNG — once regasified — are fully interchangeable. However, they differ substantially in terms of transport cost structure: pipeline gas involves very high fixed investment costs but low marginal costs, while LNG requires lower fixed costs but considerably higher marginal costs.
These different cost structures result in a more regionalized global market, leading to equilibrium prices that may vary not only across geographic areas but also depending on the type of transport used. An initial analysis of these dynamics was presented in the article Towards a More Integrated Eurasian Gas Market, which provides further background.

In this article, instead, we will focus on the intensity of the relationships between different markets and on the direction of those relationships. In other words, given the existence of multiple markets where the interaction of operators leads to the discovery of prices that balance supply and demand, we will ask which markets tend to play a leading role and which appear to be more dependent.
For example: is it the European TTF financial gas market that influences the physical pipeline gas price in China, or is it the other way around?

Measuring the Direction and Intensity of Effects

To analyze the direction and intensity of the relationships among different gas markets, we estimated several long-run equations between groups of cointegrated variables^[1]. When cointegration is present, the linear relationship among variables can be consistently estimated using a simple OLS model, with coefficients that are super-consistent.
It should be noted that more than one long-run relationship may exist among the same variables. Identifying the dominant cointegration relationships, as well as modeling the short-term dynamics, is the specific domain of VECM (Vector Error Correction Model) analysis, which goes beyond the scope of this work. The results presented here should therefore be considered preliminary and subject to further investigation.

The table below reports the estimated parameters of the cointegration relationships under consideration. Since the variables have been expressed in logarithms, the estimated coefficients can be interpreted as elasticities.

Cointegration Relationships among Gas Prices

From the analysis of these results, several key points emerge:

• there is a strong relationship between the European pipeline gas TTF financial price and the LNG financial price for the Japan-Korea Marker (JKM). The European financial price is influenced also by the European physical price — both pipeline and LNG — while in the long run the JKM price is determined almost exclusively by its relationship with TTF;
• the financial price influences the physical LNG price in China and, even more significantly, in the United States;
• the physical pipeline gas price affects the physical LNG price both in the EU market and, more strongly, in the Chinese market;
• in the global LNG market, the benchmark is set by the Chinese price, which almost entirely determines the Japanese price and significantly influences the European price. In turn, the Japanese price exerts a partial influence on both the Chinese price and the FOB price of U.S. exports.

In summary

The gas markets of the world’s main economic areas are highly interconnected and strongly influence each other. The three financial markets (TTF in Europe, JKM in Asia, and Henry Hub in the United States) show strong linkages, with the TTF playing a leading role in the long run. On the physical LNG market, Asia is the price-setter, with the Chinese market playing a dominant role.
In this context, the substitution of Chinese LNG imports with pipeline gas from Russia is likely to reduce the pressure exerted by Chinese demand on the LNG market, leading to a relative decline in LNG prices compared to pipeline gas. This adjustment, combined with the expansion of global LNG supply, could help absorb the price increases recorded since 2021.