On May 16, Staff of the Market Intelligence Branch of the CFTC’s Division of Market Oversight issued a report assessing the market impacts from expanding liquefied natural gas (LNG) trade and exports. In aggregate, U.S. LNG export plants in operation and under construction have a capacity of 10 Bcf/day, which is about 13% of current U.S. dry production. The CFTC’s report examines the impact of LNG market changes and summarizes key factors in how the LNG market outlook has evolved. The three main takeaways of the CFTC’s report are:
1. global LNG trade growth is expected to continue with U.S. LNG exports having the most rapid growth rate and a competitive price advantage;
2. U.S. LNG export growth may put upward pressure on U.S. natural gas prices and expose the relatively isolated North American market to global market dynamics; and
3. burgeoning U.S. LNG exports are affecting global LNG market dynamics, including contracting and risk management practices in CFTC regulated markets.
CFTC expects the changes in LNG markets may drive increased participation in derivatives markets. CFTC found that the LNG market is evolving to shorter contract durations and more spot transactions. These factors point to an increased need for derivatives markets for hedging, and recent experience supports this point. 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. Bottom line: expect the CFTC to pay attention to LNG’s impact on the derivatives markets.