Citi Sees Future of LNG Trading in Tanker Traffic Near Texas

  • U.S. Gulf Coast could emerge as major LNG trading hub
  • U.S. freedom for destination and resale of cargoes key

A rapidly approaching future in which shale-gas-filled tankers off the coast of Texas and Louisiana are sent all over the world could create a liquefied natural gas futures market in the U.S.

Such an easily dispatched armada, which could begin to form next year, would link prices between the U.S. Gulf Coast and other markets like Japan and the U.K., providing the basis for a LNG futures contract , Citigroup analysts including Ed Morse said in an Aug. 22 note.

“What appears to be unfolding into next year is a seismic change in the functioning of the global LNG market,” Morse said in the report. “The U.S. Gulf Coast is likely to begin to emerge as a major, if not the major, gas trading hub in the world, with cargoes being lifted and awaiting direction.”

The LNG industry is in the midst of transforming into a vibrant trading market after decades marked by staid dealing where buyers and sellers engaged in long-term contracts, with little spot trading. Energy companies and merchants have ramped up spot trading activity in recent years, first to take advantage of high demand following Japanese nuclear shutdowns in 2011, and more recently to try to minimize losses on long-term purchases in an over-supplied market.

Asian cities such as Singapore, Tokyo and Shanghai have made efforts to become hubs for LNG trading. The Singapore Exchange Ltd., for example, began publishing a twice-weekly assessment of spot LNG prices near the island and offers a futures contract based on the index.

U.S. Hub

There are several key factors that support a hub developing in the U.S. Gulf Coast, Morse said. U.S. LNG exports will increase by 43 million tons a year in the next three years, or 18 percent of global trade last year, according to Bloomberg New Energy Finance. And unlike much of the world’s LNG, companies that buy gas from U.S. terminals are free to re-sell it to anyone and reset the destination to any port in the world, Morse said.

“There should be optionality of selling, especially with LNG cargoes now transiting the newly enlarged Panama Canal, into the Atlantic or Pacific Basin,” he said. “That also means the likelihood of forward sales being priced in, providing the basis for a U.S. Gulf Coast LNG contract, despite efforts to create such a market in the Asian Pacific Rim.”

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