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Towards an Integrated Spot LNG Market: An Interim Assessment

Abstract:
This paper examines whether, and to what extent, the spot LNG markets in different regions (East Asia, Iberia, Northwest Europe, and South America) are integrated and how market integration evolves over time. We first lay out a framework of market integration in the context of global LNG market where the main supplier (e.g. Qatar) may have market power. Estimating a time-varying coefficients model, we find that a varying degree of market integration exists between all four LNG indices particularly after the Fukushima incident in 2011. We complement the time-varying coefficient analysis with a test of price convergence among the LNG indices using the Phillips-Sul (2007) methodology. The results reveal that, there is strong evidence that the spot LNG prices are converging after the Fukushima accident and they are also converging with the price of NBP in the UK. The empirical result is consistent with the change of market power of the main supplier.

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Energy Specializations: Natural Gas – Markets and Prices; Energy Investment and Finance – Trading Strategies and Financial Instruments; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
G13 - Contingent Pricing; Futures Pricing; option pricing
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination

Keywords: LNG, Spot market, Market integration, Convergence

DOI: 10.5547/01956574.39.1.xmu

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Published in Volume 39, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.