Up, up and away…

Spot gas prices in the Victorian DTS system hit an eyewatering $58.44/GJ briefly on Friday. This is around 10 times the average price. What caused this price spike and what does it mean for gas users large and small?

The price spike was due to a perfect storm of incidents and conditions. On the demand side cold weather in Melbourne (2 ℃ overnight) pushed up demand for space heating, while the ongoing outages and constrained output at coal generators Callide C and Yallourn mean gas generators are running harder than usual to fill the gap. On the supply side, production is down from Esso/BHP’s Longford gas plant. Gas was still being released from the Iona storage site, but it’s starting to hit low levels, such that the operators will be thinking about the opportunity cost of releasing more now versus saving it for future needs.

Unsurprisingly, this also translated into high electricity prices in Victoria on Friday. Spot prices hovered between $200/MWh and $350/MWh all day. This is relatively unusual – recently Victoria has often seen negative prices during sunny, windy days and price spikes into the $1,000s when there has been a supply crunch. It suggests that there wasn’t a fundamental shortage of supply and that gas generators were running to defend caps, hence why the spot price didn’t rise much above $300/MWh. At this price and the very high gas prices you’d expect a spot exposed generator to get more value from selling gas back into the gas market rather than running.

As always, a focus on spot prices can be misleading. Most gas users and retailers have their load covered under longer-term contracts, similar to electricity. But some industrial users have apparently left themselves spot-exposed, preferring to take their chances rather than lock in a contract price that they feel is unduly high. The manufacturing sector has leveraged off the recent rise in spot gas to renew their calls for activation of the domestic gas security mechanism which would allow the Federal government to intervene in the market, potentially forcing the LNG export sector to keep more back for domestic supply.

Unfortunately for domestic gas users, the main benchmarks for Australian gas prices, the netback from Asian price indicators are at high levels too. The revival of the oil price has driven up contract prices based on the Japanese oil indicator (JCC) and buoyant demand means LNG spot prices in Asia are also high.

A recent publication by the International Gas Union highlights how the gas prices in Australia’s region remain stubbornly higher than the rest of the world. While European gas prices have converged on the global average and US and middle eastern prices remain below the average, Asia and Asia pacific now trade at around a $2/GJ premium on everywhere else.

Figure 1 Global gas prices by region

Source IGU

In general gas prices across the globe are moving closer driven by an increasing trend of market-based pricing and in particular of gas-on-gas pricing. A rise in spot LNG trading has facilitated this trend. Gas-on-gas pricing is prevalent in Europe and North America and is supported by large, liquid gas hubs, led by the US Henry Hub and followed by the Dutch TTF and the UK’s NBP. There is no equivalent in Asia pacific, where the Japan Korea Marker (JKM) facilitates LNG price discovery, but isn’t a liquid trading hub. Australia’s major trading hub, Wallumbilla is growing in volume, but remains illiquid by the standards of the major global hubs. There’s a long way to go before Asia-Pacific gas trading and pricing becomes dynamic enough to allow it to converge on global price reference points in the same way the oil price does.