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Volatile Natural Gas Markets Demand Flexible Business Strategies

Asian development and demand, oil prices and economic struggles will affect future natural gas markets.

North America is producing more Liquefied Natural Gas, Asia is demanding more LNG,and Europe is struggling under the weight of recovery efforts from its economic crisis. Though the LNG market might look generally stable right now, that isn’t expected to last because of these factors, according to a report from McKinsey on the gas market’s future. As a result, any business dependent on this market needs to have flexible business strategies in place to respond.

Predicting how this market will grow involves consideration of multiple possible scenarios, four of which are outlined by McKinsey. The market will undoubtedly ride waves of growth and decline, and big opportunities are at stake.

“LNG suppliers and buyers cannot afford to wait for absolute clarity before preparing for the future,” McKinsey says.

Expanded LNG production in North America has surpassed domestic demand, driving local prices down. But those developers are hoping to start exporting the excess in the near future, which would impact global prices. Developers have applied for export permits for quantities of LNG equivalent to all of the world’s current capacity combined, McKinsey says.

But how many of those permits will be granted is unclear, and supplies could alternately come from Australia, East Africa, the Middle East and Russia. Costs for export infrastructure will affect product price, and when exporting does become an option, there are no guarantees that the supply will match the demand. McKinsey noted that consumers are slow to switch from one energy source to another, and energy-efficiency measures can also counter demand growth.

Demand from Asia will affect LNG markets, but could go up or down depending on economic growth and LNG development. Development could take place in delivery infrastructure or in local LNG production, each of which would drive demand in opposite directions.

Other factors will almost certainly influence which direction this market moves in.

“More than 75 percent of all Asian gas imports are priced at levels contractually linked to oil prices,” the report says. “Future oil prices are inherently uncertain, dependent as they are on factors such as technological developments, global economic growth, and the pricing strategies and discipline of Organization of Petroleum Exporting Countries producers.”

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