WHEN the first US export shipment of liquefied natural gas leaves the US Gulf Coast this year, gas trading will fulfil its long-held promise of going truly global.

Cheniere Energy’s Sabine Pass terminal in Louisiana is expected to ship its first LNG tanker in about December, bringing US shale gas to world markets at a time when trading of the supercooled fuel is picking up.

LNG is expected to surpass iron ore as the most valuable physical commodity after oil this year, topping $120bn, according to analysts at Goldman Sachs. Commodity traders have been positioning themselves for greater trading activity and the increased influence of the current price of gas on contracts.

Most LNG contracts have, until now, been priced in relation to crude. But Cheniere plans to use a pricing formula linked to the Henry Hub US natural gas benchmark price, in an example of the weakening hold of oil-indexed contracts over the market. Fewer deals are likely to be structured for a long period - say a decade or more - as the price of LNG moves away from being linked to crude.

“It is not going to happen overnight but [trading] volumes will build up over the next few years,” said David Thomas, head of LNG trading at Vitol, one of the world’s largest independent commodity traders. “The availability of US exports will ultimately influence prices around the world.”

Analysts say spot deals account for 30-35pc of the market, though this in­cludes any deals with a duration of less than four years — illustrating how focused the LNG market is on longer-duration deals in its 51-year history.

With US supplies coming on line, liquefied natural gas is set for a transformation

Producers need to lock in contracts to fund the construction of multibillion-dollar liquefaction and loading terminals, but consumer appetite for oil-linked contracts has fallen as the near halving in crude prices since last summer takes time to feed through.

Goldman forecasts LNG spot prices for delivery into Asia will be about 40pc lower in the fourth quarter than during the same period last year.

The prospect of US exports and a surge of supplies from Australia will increase global LNG supplies by half over the next four years to about 150bn cubic metres, according to analysts, outstripping slower demand growth in Asia and putting further pressure on prices.

With the market oversupplied, some of the biggest LNG participants will have to increase their focus on trading to boost profitability, while opportunities should increase for independent dealers that do not have their own production.

Royal Dutch Shell’s £55bn purchase of BG Group will create by far the biggest force in LNG market as both a supplier and trader.

Trafigura, the Swiss commodity house, which says it is the world’s largest independent trader of LNG, has signed short-term deals with Egypt and Argentina this year. Vitol, one of the longest-serving independent traders, has also been active in supplying Egypt, and delivered more than 1m tonnes of the fuel globally last year. Noble Group and Glencore have expanded their LNG operations in the past two years.

In the oil market thousands of contracts and cargoes change hands daily, far more than in LNG. Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, says that although LNG trading is not expected to look like the oil market soon, the move away from traditional supply deals is unavoidable.

“Volumes are still relatively small but in 2000 there was virtually no spot trade in LNG,” he says.

Spot and short-term LNG trading offers the flexibility to fill gaps caused by supply shortages and to arbitrage prices between LNG markets.

Analysts at Goldman say that there will need to be greater competition among producers eventually. “Increasingly assertive buyers will gradually turn away from long-term contracts,” says the bank.

The price difference between Asia and Europe is expected to narrow as the market becomes more global. Asian consumers have paid significant premiums for LNG deliveries. But the ability to move more spot cargoes to the region should help lower the gap, according to traders and analysts.

Some traders are urging caution, however. LNG remains a relatively immature spot commodity market, they point out, with limited participants - and the Shell-BG deal removes one big participant.

Physical spot sales represent only about 1,000 cargos a year, and to boost liquidity a dominant global pricing benchmark may have to emerge.

This week BP signed a 23-year deal to provide Kansai Electric, Japan’s second-largest electricity utility and its most nuclear reliant, with up to 13m tonnes of LNG.

Published in Dawn, Economic & Business, June 1st, 2015

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