Rising US LNG exports could put upward pressure on US gas prices and expose a previously isolated North American market to global market dynamics, a study by the US Commodity Futures Trading Commission’s (CFTC) Market Oversight Office suggested.
US gas producers’ response will be the biggest variable in the potential impact, the May 16 report by the office’s Market Intelligence Branch (MIB) said. “Over time, US production has become more efficient, and if this trend continues, LNG exports will have a lower impact on domestic prices,” it stated.
Estimates of this impact vary widely, from negligible to 9-20% over time, the study said. “Given the magnitude of US exports, there is also the potential that domestic gas markets could become subject to global supply-demand dynamics with the potential for increased volatility,” it said.
In aggregate, US LNG export plants in operation and under construction have a 10 bcfd capacity, which is about 13% of current US dry gas production, the commission noted.
The report, which is the first in a series that the MIB plans to issue, also found that:
• Global LNG trade is expected to continue rising, with US exports leading the growth rate and having a competitive advantage.
• Burgeoning US exports are affecting global LNG market dynamics, including contracting and risk management practices in CFTC-regulated markets.
“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,” noted Amir Zaidi, who directs the CFTC’s Market Oversight Office.
“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,” Zaidi noted. “In this regard, the CFTC must foster stable, vibrant, and liquid derivatives markets to support risk management practices.”
LNG Allies Inc. Executive Director Fred H. Hutchison questioned the report’s conclusion that more US exports could lead to higher gas prices.
“Much of the CFTC’s cited domestic price impact data is outdated,” he told OGJ in a May 17 e-mail. “It does not, for instance, jibe with the most recent long-term price projections released by the US Energy Information Administration in February, which show Henry Hub prices remaining in the $3-4 MMbtu range for many decades, even as US LNG exports rise.”
The notion that US gas prices will somehow rise to world levels is a view which is not shared by private or public sector experts, Hutchison added.
Contact Nick Snow at [email protected].
