Chinese companies opt for Henry Hub-linked LNG contracts

Several Chinese companies recently secured long-term five to ten-year LNG contracts based on Henry Hub prices, as a fall in crude oil prices led to elevated implied slopes.

The term contracts were announced by Chinese entities and suppliers at the World Gas Conference during the week ending May 23, with a handful pricing the LNG cargoes linked to US benchmark natural gas Henry Hub prices.

One such deal was the five-year contract between Guangzhou Gas Group and Mercuria beginning in 2026. The price for the deal is linked to JKM for the first year and thereafter is linked to Henry Hub, sources said.

ConocoPhillips also signed a deal with China's Guangdong Pearl River Management Group for a 15-year supply of LNG starting in 2028. The price for this deal is around 121% slope to Henry Hub plus a constant of around mid-$4/MMBtu, sources said.

There were also reports of another agreement signed between a Chinese company and a portfolio player during the conference, with prices similarly indexed to Henry Hub.

Market participants said China's LNG imports had slowed due to high spot prices and buyers were more interested prices under $10.5/MMBtu.

Platts assessed JKM, the benchmark price for LNG cargoes delivered to Northeast Asia, for July at $12.63/MMBtu on May 27.

Chinese companies, like Indian companies of late, are signing the five-year Henry Hub contracts as these contracts allow term deal prices below the spot prices for 2025-2027.

However, with spot LNG prices expected to fall in the second half of this decade, these contracts potentially become more expensive than spot LNG prices, sources said.

"This structure allows buyers to reduce cost at the front of the contract and the sellers would make positive margins in the second half of the contract," another Singapore-based source said.

"The risk is that HH (Henry Hub) will rise starting 2026 and spot can reduce, then banks will have to come in to lock in margins and do hedges," the trader added.

Mercuria, ConocoPhilips, Guangzhou Gas and GPRIMG did not respond to queries for comments.

Crude slopes elevated

Market participants said one of the reasons buyers were attracted to Henry Hub linked contracts was that implied slopes to crude oil were elevated.

In the ICE Brent forward curve for January 2026-December 2030, the average crude oil price is 65.63/b, according to ICE data May 26.

The JKM forward curve for the same duration was at $10.37/MMBtu, indicating an implied slope of 15.8%.

Traders noted that such an elevated slope was not attractive to Chinese buyers.

On the other hand, the Henry Hub forward curve on Chicago Mercantile Exchange showed 121%HH+$4.5/MMBtu, averaging at $9.19/MMBtu on May 23.

Price mismatches

As a result, Chinese buyers were interested in locking in LNG supply based on the Henry Hub forward curve.

However, crude oil, US gas prices, and the global LNG market can be influenced by independent supply and demand factors, which leads to the forward curves for each commodity being influenced by various factors that are not necessarily pertinent to the other markets.

Traders and portfolio companies use the JKM forward curve to compute formulae for Henry Hub and crude oil-indexed long-term LNG contracts.

However, fixing the slope in case of crude oil-linked contracts or constant in Henry Hub-linked contracts means that future moves in LNG prices do not get passed onto counterparties.

Companies manage the risk of these price mismatches by entering cross-commodity hedges to lock in the spread between the different indices to maintain positive margins, sources said.

While such a practice helps to manage the risk, it requires constant tweaking to manage the price-mismatch risks.