Methanol Gains Traction as an Alternative Energy Source

The futures markets are pricing a narrowing spread between European and Chinese methanol. Part of this reflects oversupply coupled with the relatively higher costs of production for European methanol which have impacted demand. A higher price for natural gas is seen as one of the major contributing factors to the rising European production costs.  

The price of the prompt European methanol futures contract traded in a range of €270-€440 for 2024 and €330 to €440 so far this year through February 2025. In Asia, the futures settlement price for the prompt contract month traded in a range of $280 to $325 per metric ton over the prior 12-month period to February 2025. The price spread of around $35 per metric ton between European and Chinese prices is the lowest level since August 2024, CME Group data shows.

Rising demand for ethylene and propylene (olefins), which are key products for plastics, synthetic fibers and many downstream petrochemical products, has been accompanied by a scale-up of methanol-to-olefin (MTO) processing plants across Asia. An MTO plant will convert methanol, derived from various sources including coal, natural gas or biomass into olefins.  This growth has supported trading volumes in China’s methanol futures market.  

Strong trading activity has continued in 2025, with January 2025 average daily volume in Chinese methanol more than quadrupling compared to the same point in 2024. Global traded volumes in methanol futures for January 2025 also doubled compared to the same period in 2024.  Open interest reached a record  1,800 contracts across the methanol complex in January.

The shipping industry, led by the International Maritime Organisation (IMO), has pledged significant cuts to greenhouse gas emissions, which will likely result in a wider range of fuels being used in vessels, alongside the adoption of novel energy efficiency measures. 

In Europe, the combination of the Emissions Trading Scheme (ETS) and its FuelEU Maritime regulation, which came into force in January 2025,  is expected to help level the playing field between the more traditional bunker fuels such as marine gasoil or very low sulphur fuel oil (VLSFO) and alternative fuels like biofuel-based bunkers, LNG, methanol and ammonia. By levying heftier non-compliance costs on  the use of fuels that emit  higher levels of greenhouse gases, more vessel owners will likely be motivated to turn to alternative fuels to avoid higher costs. The existing methanol futures are expected to remain as a key benchmark for the market with carbon related differentials or a green premium applied for trades between the existing methanol futures and any lower-carbon fuel alternatives.  

S&P Global Platts noted some availability issues with more sustainable methanol, though  blending methanol with green methanol could be one possible solution to alleviate the shortage. This could also translate into higher demand for hedging conventional methanol via the futures markets at exchanges like CME Group. 

Methanex, the world’s largest producer and supplier of methanol, noted that 2023 was the first year that orders of dual-fuel methanol ships outpaced orders for LNG-powered vessels. Interest in methanol continues to grow, with about 350 methanol ships likely to be operational by 2030. Over time, bio-methanol and e-methanol are two emerging fuels that could qualify as a green fuel under applicable laws.  

The use of some alternative fuels like methanol and ammonia remains in the early stages of development compared to the more established markets like LNG. In Singapore, bunker sales of methanol in 2023 were around 300 tons but this figure had risen to 1,600 tons by 2024. In Europe, bio-methanol is also beginning to emerge with around 700 tons delivered at the port of Rotterdam in 2023, according to port authority data. 

Risk management remains a key component for the methanol market, with new centers of demand emerging as the world continues to transition to alternative energy sources. Ongoing volatility in the underlying commodity may have more firms turning to the futures market to manage price risk.