June 2023 Highlights
  • U.S. LNG key to balancing global gas market thanks to cargo diversion flex and cancellation flex. Forecasted growth in U.S. LNG export capacity increases the importance of the flex role of U.S. LNG.
  • Gulf Coast LNG Export marker reflects value of U.S. FOB cargo, with differing pricing dynamics depending on market regime.
  • U.S. LNG offtakers have the ability to manage risk physically or via hedging.

Market regime shifts set to impact Gulf Coast LNG Export marker

U.S. LNG supply plays a key role in balancing the global gas market, both across (i) cargo diversion flex in balancing the Atlantic and Pacific basins (discussed in our March note) and (ii) cancellation flex, where gas is able to be pushed back into the domestic market in times of global oversupply. U.S. LNG export capacity is forecast to around double by the end of the decade, increasing the importance of the flex role of U.S. LNG.

The Gulf Coast LNG Export marker is a reflection of the value of a U.S. FOB cargo. This marker will interact very differently with the domestic and global price indices depending on the market regime.

  • Tight/balanced regime: Marker set by max netback of DES NE Asian LNG (JKM) or DES NW Europe (NWM), with secondary influence of cargo flex value. Low correlation / dislocation with Henry Hub.
  • Oversupplied regime: Marker set by the intersection of global netbacks and the floor of U.S. gas (Henry Hub dominated) indexed variable costs of offtake. High correlation with Henry Hub, lower volatility.

Offtakers of U.S. LNG look to manage their price risk in a variety of different ways. Two top methods include physical sale indexation and hedging of the exposures within the liquid horizon (e.g., using Henry Hub, JKM, TTF, Gulf Coast LNG). Which hedging instruments are chosen can have an impact on retention of important diversion flex value, and level of basis risk exposure. 

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