A changing energy landscape

Gas and oil prices have historically moved together, but the fundamentals driving their relationship are evolving rapidly. As global LNG trade expands and the energy transition accelerates, understanding the new dynamics between these two commodities has become essential for energy market participants.

In this podcast, Evariste Nyouki explores how regional pricing mechanisms, fuel switching behaviors, and U.S. production dynamics are reshaping the gas-oil price spread—and why the post-2026 outlook may surprise markets.

From oil dominance to gas-on-gas competition

The historical link

Historically, gas and oil prices were strongly linked, especially in Asia where oil was dominant, easy to transport, and widely used across sectors. This created a natural price correlation driven by substitution possibilities.

Today’s shifting landscape

Gas-on-gas competition now accounts for about 50% of global consumption, up from 31% in 2005. This reflects deeper market liquidity, the growth of spot LNG trading, and more interconnected global gas balances.

However, regional differences remain critical:

Asia: Oil indexation remains high at around 71% in 2024, primarily because many consumers can easily switch between oil and gas depending on relative economics and availability.

Europe: Market-based pricing dominates at 82% on gas-on-gas competition. Yet since the collapse of Russian pipeline flows, Europe’s heavy reliance on LNG has reintroduced oil price dynamics. When LNG cargoes become scarce, oil-indexed contracts matter again for securing supply.

Fuel switching: The “energy of last resort” mechanism

When gas becomes expensive or constrained, oil functions as an energy of last resort. The 2022 energy crisis demonstrated how quickly and dramatically this substitution can occur:

China’s rapid response

In 2022, China cut gas consumption and burned more oil instead:

• Gas consumption: -6.6%
• Oil consumption: +7.6%

Europe’s industrial and residential shifts

• Industry: Gas use fell by 13% as manufacturers reduced production or switched fuels
• Households: Gas use dropped 15%, while oil product use increased in countries like Germany and Greece as consumers turned to heating oil

Producer strategies: Indonesia’s example

Indonesia reduced oil-fired power generation from 40 TWh in 2008 to just 6 TWh in 2022. However, during the 2022 crisis, the country increased oil use for power generation to free up LNG volumes for export to Europe when international prices were extremely high.

Why Switching Happens So Fast

Many facilities maintain backup systems that enable rapid fuel switching when prices spike. Oil’s versatility—usable for heating, power generation, and transport—makes it the ultimate flexibility option when gas markets tighten.

Transport sector: two diverging trajectories

Road transport: price sensitivity meets electrification

LNG trucks: Adoption grew rapidly in China and India, but these vehicles are highly price sensitive. When LNG prices spiked in 2022, sales dropped sharply.

Electric trucks: The electrification wave is accelerating dramatically:

• China’s EV sales jumped by 140% last year
• EVs captured nearly 20% of heavy-duty truck sales in early 2025

This structural shift reduces future gas demand growth in road freight and weakens a potential gas-oil coupling channel.

Maritime transport: LNG Becomes the standard

The shipping sector is moving in the opposite direction, with LNG emerging as the leading transition fuel:

• Current fleet: 781 ships can use LNG
• 2030 projection: Over 1,400 LNG-capable vessels expected
• Technology trend: Dual-fuel engines dominating new builds, allowing ships to run on either LNG or fuel oil depending on relative prices and availability

The U.S. factor: associated gas links oil drilling to gas supply

A critical production dynamic

The United States, now the world’s leading LNG exporter, produces a significant amount of associated gas—gas extracted alongside oil production. This represents around 28% of U.S. total gas production.

The post-2026 paradox

Market consensus expects gas prices to stay cheaper than oil after 2026. However, this assumes abundant gas supply. Here’s why that might not happen:

If oil prices fall → drilling activity slows → associated gas supply shrinks → gas prices could rise

This would flip the script: gas prices rising while oil prices fall, challenging the prevailing market view and potentially tightening global LNG balances.

Downstream Players Respond

Forward-thinking companies are already positioning for potential supply constraints. For example, Japan’s power generator JERA is investing in U.S. shale gas projects to secure long-term resources and reduce exposure to spot market volatility.

Could gas become the new energy benchmark?

If gas remains abundant and competitive, it could become the benchmark for cleaner fuel transitions. With electric infrastructure expanding and decarbonization accelerating, gas could complement renewables as the leading transitional energy source.

However, this scenario depends on supply remaining strong and diverse. The interplay between oil drilling activity, LNG export capacity, and demand growth will determine whether gas maintains its competitive advantage or faces periodic tightness that pulls prices back toward oil parity.

Key takeaways

• Gas-on-gas competition has grown from 31% (2005) to 50% of global consumption today
• Asia maintains 71% oil indexation in 2024 due to fuel switching flexibility
• During the 2022 crisis: China’s gas fell 6.6% while oil rose 7.6%; Europe’s industrial gas fell 13%
• Road electrification is accelerating: EVs reached nearly 20% of China’s heavy truck sales (early 2025)
• Maritime sector moving opposite direction: LNG-capable vessels expected to exceed 1,400 by 2030
• U.S. associated gas (28% of production) creates direct linkage between oil drilling and gas supply
• Post-2026 outlook uncertain: falling oil prices could reduce gas supply and narrow the spread

Conclusion

The gas-oil relationship is not disappearing—it is evolving into something more complex and regionally differentiated. While hub-based pricing and LNG liquidity have reduced structural oil indexation over time, the correlation can return quickly and forcefully during stress events.

Three key transmission channels keep gas and oil connected:

Fuel switching remains the fastest reactivator of correlation when gas markets tighten, as demonstrated dramatically in 2022 across China, Europe, and producer nations like Indonesia.

Transport sector dynamics are pulling in opposite directions: road freight is electrifying rapidly, weakening gas-oil linkages, while maritime shipping is embracing dual-fuel LNG systems that maintain flexibility between the two fuels.

U.S. associated gas creates a structural supply-side linkage that could challenge market consensus. If oil prices decline materially after 2026, reduced drilling activity could tighten gas supply and lift prices—potentially narrowing or even inverting the expected gas-oil spread.

For market participants and decision-makers, monitoring gas-to-oil ratios, LNG balance tightness, and U.S. upstream drilling signals remains essential to navigating volatility and positioning effectively in the post-2026 energy landscape.