The trade in gas

The trade in gas

DATA-DRIVEN ARTWORK<br>Hard facts: The spiral images that accompany our cover story on commodity markets resemble works of art. But actually they were generated by  software from hard facts ... (Infographics: Florian Müller)
Hard facts: The spiral images that accompany our cover story on commodity markets resemble works of art. But actually they were generated by software from hard facts ... (Infographics: Florian Müller)
The trade in gas

The trade in gas

Financial markets not only deal in stocks and bonds, but also in commodities such as oil and gas. How exactly do they work?

Text: Bärbel Brockmann

Commodity markets

gas, agricultural products, and metals have been traded for centuries. Prices can fluctuate widely, such as when extreme weather conditions affect harvests.

Fossil fuels

The world posseses limited reserves of oil and natural gas. But industry experts expect those reserves to last for at least the next half century.

LNG markets

bringing gas markets closer in terms of both deliverability and price. One result is a convergence in regional prices for natural gas.

High supply

High levels of international supply have sent natural gas prices for end customers in Germany to their lowest point in 12 years, according to the Verivox price portal.


Most goods are not consumed where they are produced. They need to be traded – in enormous volumes. This is especially true of commodities such as coffee, cotton, gold, oil, and natural gas. There are two possibilities when it comes to trade: producers can sell goods directly to their customers, or they can go to a marketplace. For energy products such as oil and gas, many transactions take place outside the commodity markets, with independent brokers often mediating between buyers and sellers.

But what about the prices? How do sellers and buyers know what is an appropriate price to ask or pay? Both sides need a list price that can be used as a point of reference. In the conservative oil and gas business, there are agencies that have been providing this service for decades. One of them is S&P Global Platts. Platts runs a platform on which producers, refineries, and traders can post recent transactions for oil brands, crude oil products, and gas – on a voluntary basis. Platts uses these data to calculate reference values or benchmark prices for products that change hands in the real world.

Like oil, most gas is also delivered directly from the producer to the customer. The two parties usually have a relationship based on supply contracts that extend for many years. This benefits both sides. Long-term contracts give producers the assurance they need to make billions of dollars’ worth of investments to produce gas and transport it through pipelines. Long-term agreements also give purchasers greater confidence that their needs will be met. But long-term contracts also pose – for both sides – the risk of price-fixing. After all, it is almost impossible to predict how energy prices will develop in the future. So, western European customers whose suppliers are based primarily in Russia and Norway were instrumental in agreeing to link the price of gas to that of oil.


In recent years, however, the gas market has decoupled itself from the oil market. Gas is no longer simply a by-product of oil production, but is being produced in its own right. So there is less reason to link its price to that of oil. Players on the market are now devoting greater attention to the spot-trading prices. Thanks to newly discovered fields, gas has become available in large quantities. New LNG terminals at ports have also made it easier to ship around the world. As a result, the gas market has shown a rapid rise in liquidity. This in turn makes gas a much more attractive commodity to trade, and it has triggered interest on stock markets. The New York Mercantile Exchange (Nymex), one of the most important trading centers for oil and gas, has recently introduced a futures contract for LNG from the United States. Observers note that it has the potential to become a benchmark for international gas prices.


Commodity exchanges are marketplaces, just like they were a thousand years ago. In those days people traveled in person to a market, carried their wares with them, and looked for buyers. Today it is enough to issue a promise that one will deliver a certain amount of crude oil, natural gas, or gasoline – either right then or at a mutually determined subsequent point in time. The latter are known as futures, and they can protect buyers against price hikes. A shipping company, for example, can purchase diesel for its fleet at the current rate and have it delivered later without having to worry about fluctuations in price. Traders actually no longer need to go directly to the commodity markets. Floor exchanges are becoming a thing of the past. Most commodity markets have become high-tech electronic platforms that enable a huge number of transactions to be made and settled. In theory, dealers can access these platforms from anywhere in the world – providing they possess the right licenses and the requisite technical systems. Generally speaking, however, dealers work in large trading rooms on behalf of buyers or sellers.

In addition to the Nymex which now belongs to the Chicago-based CME Group, the most important market for trading in oil and gas futures is ICE Futures (formerly the International Petroleum Exchange) in London. It was acquired by the Atlanta-based Intercontinental Exchange in 2001. Similar to stock markets, commodity markets have also been consolidating over recent years in order to achieve scale-up effects and reduce costs. Entirely new markets have also arisen in recent years. One of these is the Spimex, or St. Petersburg International Mercantile Exchange, which is fueled by major Russian commodity producers like Gazprom and Rosneft. Opened in 2009, it is the largest platform for energy commodities in Russia.

Photo: imago stock&people
Photo: Gazprom
Photo: EEX Leipzig


Does this mean rosy times for commodity markets? Not entirely! Digitalization is a potential source of concern. At first glance, new blockchain technology would appear to combine the benefits of bilateral and exchange trading without actually requiring a commodity market. Everyone can trade with everyone else, and at the same time everyone can also see what everyone else is doing. Everything is very transparent and settlements are secure, or at least that is what blockchain advocates claim. “The technology is interesting, but it is no substitute for how a commodity market works or for how its transactions are settled,” says EEX management board member Paulun. The main point of his argument has to do with the fact that blockchain trading is not anonymous. “The blockchain principle is based on everyone being able to see everyone else. But anonymity is precisely what people like about exchanges.” And that has its advantages. Everyone is treated the same on exchanges, he adds, which makes it nearly impossible to draw inferences about their individual strategies. Regardless of whether blockchain technology succeeds in making inroads, global energy markets will probably continue to function as they do for some time, with prices determined by supply and demand.

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