Wolfgang Meinhart, Hamburg
A recent staff report by the Market Intelligence Branch Division of Market Oversight of the US Commodity Futures Trading Commission (CFTC) identified three conclusions regarding the liquid natural gas (NGL) development and market impacts. The report looked at the recent LNG history and global demand for the commodity from a variety of public source evaluations by market observers of the LNG market impacts.
As the increased US shale gas supply coincided with the global shift to natural gas from other fossil fuels, investments into LNG became a likely fit. The report made the following conclusions regarding LNG:
- Global LNG trade and US exports are expected to grow - Global natural gas demand is expected to grow at 1.6% per annum. Much of the demand is in regions with insufficient domestic production and infrastructure, thus LNG imports can fit the need. The US LNG industry has made major investments in LNG export capacity, such as with Sabine Pass and Cove Point, with additional export capacity scheduled over the next few years. The competitive advantage of US exports is expected to continue, possibly making the US one of the largest LNG exporters. Other competitive pressures may face exports such as low oil prices.
- Domestic natural gas prices may increase with increased US LNG exports – the main variable would be production response from domestic natural gas producers. If the trend in production is to become more efficient, LNG export will have a lower impact on domestic prices, or could become subject to global supply-demand dynamics and increased volatility.
- US LNG exports can affect global LNG market dynamics – changes in pricing mechanisms and shorter contract durations may increase the need for derivatives markets for hedging. With gas-indexed contracts becoming more prevalent, the US derivatives markets will increase, especially by overseas traders.
Amir Zaidi, Director of the CFTC’s Office of Market Oversight, stated, “Over $30 billion in construction capital has been invested by the two firms with operational LNG plants. Further, significant investments in support of these plants have been made in new natural gas pipeline assets. The LNG firms and their customers use CFTC regulated futures and swaps to manage investment, commodity, and operational risks. It is important for the CFTC and the public to understand the changing physical market dynamics. In this regard, the CFTC must foster stable, vibrant, and liquid derivatives markets to support risk management practices.”
This is the first in a series of reports from staff of the Market Intelligence Branch. Additional reports on issues of current market interest, such as market liquidity and volatility will be issued to help CFTC leadership and the public and make informed policies.
The complete report can be found on the CFTC website.