By Andrew Nichols: EnerCom
Historically, the price of crude oil and the price of liquified natural gas, or LNG, showed strong signs of correlation. For example, in 2017, the monthly average spot price for a MMBtu of LNG in Japan showed an 85% correlation with the price of U.S. crude oil benchmark West Texas Intermediate (WTI). However, after the massive drop in the price of crude oil during the COVID-19 pandemic the two are not so tightly correlated.
In 2019 the correlation between the price of WTI and spot prices for LNG in Japan showed less significance with movement in one showing negative correlation of 41%. During the same year, the correlation between the spot price of LNG in Japan and a MMBtu of natural gas at Henry Hub showed stronger relevance, however, with movements in one showing a 63% correlation to the price of the other. The massive spike in price in January of 2021 is due to a combination of an intense cold front in northeast Asia and a shortage of ships to transport the natural gas.
Skipping over 2020 due to anomalous data caused by the Covid-19 pandemic, LNG spot prices have shown little correlation to WTI since 2018. This trend has continued far in 2021 with LNG showing a stronger correlation to Henry Hub natural gas prices than WTI. EnerCom expects that LNG will become even more correlated with natural gas prices and less correlated with crude oil as time goes on. U.S. natural gas prices have become more influenced by the global economy as exporters of natural gas increase their capacity and send more LNG abroad. The U.S. set a record for liquified natural gas exports in November of 2020 so if this trend continues the correlation will become even tighter.
