Oil Price Rise: Beyond the Usual Suspects

One of the biggest energy stories of the decade is the rise in oil prices. West Texas Intermediate, the US benchmark, opened the new millennium at $25.56 per barrel, less than a quarter of the current level. Higher oil prices are dragging gas and LNG up as well. In Asia and much of Europe, LNG contracts are linked to oil by an explicit contractual formula that traditionally has followed an “SCurve” to dampen price rises above certain defined thresholds. But sellers have recently been making headway in increasing the slope to crude oil and eliminating the S-Curve structure entirely. Without the S-Curve and at crude oil parity on an equivalent heating-value basis, the $110/Bbl barrier breached by WTI on March 13 equates to almost $19/MMBtu for delivered LNG. In the US and the UK, where delivered LNG prices are set by gas-on-gas competition, markets are still strongly influenced by oil prices, albeit with other intermediating factors, and largely mirror crude’s rise. Henry Hub, for example, started 2002 at $2.75/MMBtu. But it stood at $9.11/MMBtu on March 19. Download here