Long-Term Sales and Purchase Contracts: To Be or Not To Be?
Published 16 September 2020
Prospects of long-term contracts (LTCs) in international trade are a subject of an ongoing discussion. An alternative to long-term and medium-term contracts are short-term supplies and spot transactions. Herein we treat LTCs somewhat differently from generally accepted way in the gas industry - long-term contract means a contract of five or more years in duration instead of ten and more. We regard medium-term contract as a contract of one to four years, short-term contract lasts for less than a year, and spot contract - as less than three months between its signing and execution. Analysts who are skeptical on the prospects of LTCs claim that their role is diminishing in international trade along with and because of a decreasing role of oil-indexation in pricing for natural gas. While the LTCs are often associated with oil indexation pricing mechanism and short-term supplies - with spot prices, the duration of contracts and their price conditions are different issues. The LTCs prices could have linkage to day-ahead forward prices, while short-term contracts pegged to the oil index. We assume that there are indigenous reasons for emergence and persistence of the LTCs other than pricing patterns. The article studies reasons laying beneath a necessity for long-term relationship between a buyer and a seller in the natural gas industry because.