Energy market financialization: Empirical evidence and implications from East Asian LNG markets

Abstract

In the process of transferring from oil indexation to competitive pricing for natural gas, the number of potential gas trading hubs that underpin the competitive prices is a key question, but lack of empirical investigations. This study employs a Structure Vector Autoregression model (SVAR) and monthly LNG price data of four East Asian importers to examine whether the natural gas markets are integrated among them. The study finds that LNG markets are fragmented and thus there are different market fundamentals in the four examined markets. The results suggest that there should be multiple LNG benchmark trading hubs at the time being so that each hub could reflect different fundamentals. Since gas trading hubs in different markets are not exclusive, governments and gas industry in East Asia should collaborate in hub building because they face common challenges in the process.

Trans-ASEAN gas pipeline and ASEAN gas market integration: Insights from a scenario analysis

“…However, the presence of the AEC offers a unique opportunity to reconcile the different interests and thus create change. Such a successful change would offer lessons for Northeast Asia, which is in the process of a similar transition (Shi et al, 2019;Shi and Variam, 2016). The ASEAN gas market integration could also win ASEAN a benchmark hub price for the natural gas market, which was proved to be fragmented in East Asia (Shi et al, 2019).…”

“…Second, the model does not endogenize LNG infrastructure and contracts and thus is not able to accommodate the significant dynamics of LNG trade (Zhang et al, 2018a). Third, the price in the model is mainly driven by production costs with no consideration of other market factors that have been well documented in the literature, such as other regional gas markets (Geng et al, 2016a), the US shale gas revolution (Geng et al, 2016b;Ji et al, 2018b), oil markets (Ji et al, 2018a;Shen et al, 2018;Zhang et al, 2018a), and gas market financialization Shi et al, 2019).…”

“…The gas resource is unevenly distributed in ASEAN and there is a mismatch between production and consumption, which, together with the projected dramatic growth in the use of natural gas in ASEAN, call for regional gas market integration (ACE, 2017a, b). More broadly, the fragmented natural gas markets (IEA, 2017), the shift away from oil indexed pricing mechanism (Shi and Variam, 2016), the rise of US as an LNG exporter (Geng et al, 2016b), and ongoing gas market financialization Shi et al, 2019) signal an urgency to integrate the natural gas markets at regional and global levels. The need of market integration is well recognized in ASEAN.…”

“…First, there is no discussion on how the ASEAN gas markets might be integrated. The existing studies on energy market integration (EMI) in ASEAN and East Asia, such as Ahmed et al (2017), Nurdianto and Resosudarmo (2011), , , Wu (2011), andShi et al (2019), focus on broad issues or electricity market integration. Second, among the existing studies that discuss the ASEAN gas market integration, including TAGP (Shi, 2016;Sovacool, 2009a, b), there is no attempt to quantify the impact of ASEAN gas market integration.…”

Price and Volatility Spillovers Between Crude Oil and Natural Gas Markets in Europe and Japan-Korea

“…They also suggest that price bubbles are more prevalent in Japan and Europe. Shi (2016) provides an introduction to gas pricing and trading hubs in East Asia, while Shi et al (2019) investigate whether the natural gas markets are integrated in East Asia providing evidence that country-specific heterogeneities dominate the dynamics of LNG prices. Shi and Variam (2016) suggest that the relaxation clauses will reduce costs for East Asian LNG importers.…”