We are currently witnessing a paradigm shift in the way LNG is priced and traded around the globe. From the first major shipment from Algeria to the UK in 1964, LNG has typically been sold under long-term contracts, usually between producers and utilities. These long-term contracts were almost always priced off of an oil-indexation linked to North Sea Brent crude or Japan Customs-cleared crude (JCC) because of the liquidity and transparency of these markets. While LNG supply growth increased significantly over the next four decades, the way LNG was traded and sold did not change much at all. By 2000, short-term LNG, defined as transactions under contracts of four years or fewer, only represented 2% of the market. Since the new millennium, though, short-term LNG trading has increased to become nearly 30% of the market. Spot transactions, defined as trades whereby cargoes are delivered within 12 months of the transaction date, now account for half of these short-term transactions. This momentum for shorter-term trading, supported by US LNG supplies and a growing number of LNG consumers and traders, is set to fundamentally alter the way LNG is priced and traded.
This paper will examine the US LNG market, the distinct characteristics of US LNG, and how the global LNG market is fundamentally changing the way LNG is traded and priced. Destination- flexible US LNG, along with structural changes in global LNG market fundamentals — notably the foreseeable oversupply in the market in the coming years, a corresponding oversupply in the LNG carrier market, the growing importance of traders, and the number of new buyers entering the market that are seeking shorter-term contracts — are some of the key factors that will fuel the transformation of global LNG trading and pricing.