A shift in the global LNG market toward shorter and smaller contracts could help foster a U.S. market for derivatives tied to the burgeoning commodity, a federal trading regulator said.
Unlike oil, global gas trade has mostly consisted of long-term contracts that allow pricey export ventures to receive financing. But as new projects pump additional supply into the market and shipping capacity grows, buyers are opting for shorter-term contracts and even spot trades, the Commodity Futures Trading Commission said in a May 16 report.
"These factors point to an increased need for derivatives markets for hedging, and recent experience supports this point," the CFTC said. "Additionally, as gas-indexed contracts become more prevalent, and U.S. exports increase, it is very likely that trading in U.S. derivatives markets will increase as a result, especially by overseas traders."
The growing U.S. LNG export volumes could also raise domestic gas prices by as much as 9% to 20%, the CFTC found. The commission oversees the futures and options markets and has not typically dealt with LNG.
While the derivatives market for U.S. oil and natural gas is robust, financial instruments tied to U.S. LNG are essentially nonexistent. Industry players are eager to get a transparent pricing mechanism off the ground, in part so they can hedge against dramatic changes in LNG prices via futures and options.
"This has definitely been a topic of discussion lately," Jason Feer, head of business intelligence at the oil and gas ship broker Poten & Partners, said in an interview. "This is something that futures exchanges and market participants would have been talking to regulators about."
Feer pointed to S&P Global Platts' Japan-Korea Marker, or JKM, which has seen a ramp-up in liquidity and trading volume. "Right now, the JKM swap is really the only game in town," he said. "There's a whole lot of people who think that you should have the possible emergence of a U.S. Gulf Coast LNG price."
The U.S. has two operational LNG export terminals: Cheniere Energy Inc.'s Sabine Pass in Louisiana and Dominion Energy Inc.'s Cove Point in Maryland. Four additional projects are set to come online by the end of 2019, which would bring total U.S. LNG export capacity to more than 9 Bcf/d.
That new supply will add liquidity to the spot market, Feer said, giving hope to advocates of a viable Gulf Coast LNG price that would be able to lock in the spread between the U.S. and the JKM or other overseas markers.
One potential obstacle to that plan is a tightening in the shipping market expected later in 2018 and carrying into 2019, Feer said. With low LNG shipping rates, orders for new vessels have dropped off. "You don't have a huge order book of new LNG carriers that are going to come to market in the next several months," Feer said. "The biggest downside risk is going to be the ability going forward to move things around efficiently."
S&P Global Platts and S&P Global Market Intelligence are both owned by S&P Global Inc.