London 10 November 2009 

An oversupply of natural gas and continuing pressure on oil supplies could break the link between gas and oil prices, the head of the International Energy Agency (IEA) said on Tuesday.

In many parts of the world outside the United States gas prices are contractually linked to world oil prices but this link has been under pressure in a market that looks awash with cheap gas for years ahead.

Nobuo Tanaka, IEA Executive Director told Reuters in an interview the oversupply of natural gas looked likely to continue in the short to medium term.

He was speaking at the launch of the IEA's annual World Energy Outlook, which looks at the likely shape of the global energy market over the next two decades.

"Demand for natural gas has been falling significantly, so the price of gas has been falling as well, but crude oil prices have been relatively high," Tanaka said.

"Historically, the price of natural gas and oil has been linked, but this link could be broken. This could be bad news for producers but good news for for consuming countries."

Most European natural gas supply contracts have been priced off refined oil products, such as fuel oil, since the 1970s when there were no organized gas markets and major consumers used to choose between the two fuels. The contracts have been popular with big buyers and sellers because they guarantee long-term supplies at a predictable price, with oil price movements filtering through to their gas contracts months later.

But a recession-driven gas glut and an unprecedented influx of liquefied natural gas (LNG) has seen European spot market prices sag well below oil-linked levels in 2009, with little prospect of a sustained rebound in spot gas prices for at least a few years.

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By Ikuko Kurahone, Thomson Reuters