Why Energy Pricing is Strange
Three regional gas markets, one global oil market — and the physics that explains the difference
On August 26, 2022, the European benchmark TTF natural gas contract closed near €320 per megawatt-hour — at the contemporaneous EUR/USD exchange rate that translates to roughly $93-95 per million BTU. On the same day, the U.S.
Henry Hub natural gas contract settled in the high single digits per million BTU. The Asian JKM benchmark — the spot price of LNG delivered to Northeast Asia — was trading near $70 per million BTU through the same period. Three benchmarks for what is, on paper, the same molecule.
Roughly an order of magnitude separating the cheapest from the most expensive. Now compare that with crude oil over the same period. ICE Brent traded near $100 per barrel.
NYMEX West Texas Intermediate traded near $93. Dubai-Oman, the Asian benchmark, traded near $98. A 7% spread, top to bottom, across three continents.
Same commodity complex; same trading day; one market is converging within a few percent and the other has decoupled by an order of magnitude.
That is the opening. Finishing a lesson is where it stops being interesting and starts being useful: the full lesson runs to 7 sections and ends with 6 practice questions. A free account is what opens the rest, and the other 255 lessons in the Academy with it. No card.
What this lesson covers
- 1Natural gas does not pass the same test
- 2Power and refined products: also regional, for different reasons
- 3The arbitrage-bound regional spread
- 4Round-trip transport cost as a fraction of cargo value
- 5August 2022 — the largest regional gas-price divergence in modern history
- 6Where to see this on the platform
- 7Summary