As US LNG volumes increase, trading optionality expands

The optionality of US LNG, combined with a growing trend for more LNG to be traded on a shorter term basis, has presented an opportunity for the market to expand the way LNG is traded. In response to these market trends and growing US LNG exports volumes, the Intercontinental Exchange will list a US Gulf Coast LNG futures contract for trading beginning on trade date May 4, subject to the completion of necessary regulatory processes.

So what incentivized ICE to launch a futures contract for US LNG? To answer this question, it’s important to take a look at how the US LNG industry has evolved over the past 15 months.

While the US exported its first commercial cargo of LNG last February, the market is still trying to gauge how big of an impact US LNG it will have on the global  market. Since February 2016, the nation’s sole LNG export terminal, Sabine Pass, has managed to export LNG to 17 different countries, about half of the total number of countries that are capable of importing commercial levels of LNG. Over the next three years, four more projects are expected to begin operations, increasing global capacity by 25%. By 2020, the US will be the third largest LNG exporter, behind Australia and Qatar.

While the sheer volume of new LNG supplies coming out of the US is impressive, the real story in the global LNG market is how unique US LNG is compared to today’s global supply. US LNG has distinct attributes: It has no destination restrictions and there is much more flexibility in terms of offtake volumes. The LNG market is dominated by long-term take-or-pay contracts with destination restrictions, making US LNG even more attractive to trade. Put simply, the US will rival Qatar as the producer with the most flexible gas.

Looking at the companies that have signed long-term contracts with US LNG projects, the destination and offtake flexibility complements the overall objectives of most offtakers. Shell/BG and Gas Natural, two currently active long-term offtakers of US LNG, are utilizing the flexibility of their US LNG supply to strategically optimize their global LNG portfolio.

These attractive elements have not gone unnoticed by market participants and observers. The US Energy Information Administration released a March report stating, “The large U.S. LNG export capacity, combined with destination flexibility in the off-take contracts, will result in a greater liquidity in global LNG trade. The growth in liquidity will lead to a gradual shift away from long-term, oil-linked contract pricing toward more short-term, spot-based transactions.”

The book "LNG Markets in Transition: The great reconfiguration" predicts that short-term trade could account for as much as 43% of LNG trade globally by 2020. As US LNG has some of the core attributes to trade on a short-term basis, US LNG prices will gradually play a growing role in influencing the price of LNG around the world.

The ICE futures contract will be cash-settled against the Platts Gulf Coast Marker. For margining purposes ICE will use a new set of model-based US GCM LNG spot market forward curves extending to 48 months that will help market participants manage risk and calculate margin capital requirements.

The combination of growing volumes of US LNG and the development of new trading and hedging mechanisms for those volumes will give market participants an opportunity to play a decisive role in influencing and determining global LNG prices.