DIVERGENT VIEWS ON ATLANTIC PRICE CONVERGENCE
The growth in liquefied natural gas, particularly in the Atlantic Basin, is increasing arbitrage trade between North America and Europe, leading many to posit price convergence between the two markets. This Private Report identifies six preconditions-or stepping stones-that need to be in place for price convergence to occur. It concludes that many, but not all, of the six preconditions are likely to be in place before the end of the decade.
* The price convergence theory is based on an overly simple view of price mechanisms in Europe.
* Europe will continue to have a dual price environment of long-term contracts and spot prices, with the two potentially far apart for periods of time.
* Oil indexation is likely to remain the predominant price-setting mechanism for the bulk of long-term contracts, representing the majority of supply in Continental Europe based on the preferred choices of both sellers and buyers.
* European spot prices will become increasingly influenced by North American prices. However, seasonal factors and logistical constraints mean that there will continue to be price disconnects.
