“Gone are the days of $4/GJ gas”. This is a phrase that many following the Australian energy markets have heard numerous times and believed to be true since the advent of the Liquified Natural Gas (LNG) industry in Queensland. For years, this phrase held true with the gas spot price in Victoria (a key producing region south of Queensland) averaging well above $8/GJ between 2016 and 2019. However, the linkage with the international LNG market, which has largely been responsible for this bullish trend, is now also a key driver for the softening in spot prices seen in recent months.
As shown in figure 1, Victorian gas prices for the current financial year has seen a 43% drop in their monthly average between July last year and May 2020. This trend is not too surprising given oil-linked Asian LNG prices – which can be seen as a sort of upper bound for gas prices through netback pricing – have also been quite bearish. Gas demand in Australia also peaks over winter months (June to August) when the fuel is used for heating. What is rather interesting however, is the (lack of) correlation between these low gas prices and gas demand for electricity generation (GPG) (see figure 1). In this Chart of the Week, we provide commentary and insights into underlying market drivers behind this outcome, and factors that may well change this trend in the near future.
