The impact of growth in the U.S. LNG exports has also been reflected in the futures market, with the market share of trading volume from participants outside U.S. rising to 27% in 2024 Q3 versus 18% two years ago, as shown in Chart 1. This is a relatively new trend as the U.S. gas market has been historically driven solely by domestic fundamentals and the price influenced primarily by the activity of the U.S.-based trading desks. The meteoric rise of the U.S. LNG exports have enhanced the linkage across the U.S., Europe and Asia. The trading of natural gas has become intertwined with the global dynamics of supply/demand and global events. The natural gas demand for feedgas represents currently around 13% of U.S. total domestic demand, according to S&P Global Commodity Insights.¹ This gas, once liquified and converted LNG, becomes a flexible supply to the rest of the world, creating a linkage across the once isolated regional markets.

U.S. LNG developers are leading the stage for innovation in contractual arrangements and project development as opposed to the traditional LNG agreements, which are indexed to oil prices also known as oil-price-escalation (OPE) with a three- or four-month lag. U.S. LNG long-term agreements (also known Sales & Purchase Agreements) are priced based on gas-to-gas (GOG) pricing. This represents the framework by which natural gas is competitively priced based purely on the interplay between gas demand and supply. Oil indexation prohibits cargo arbitrage due to the lack of responsiveness since oil prices are driven by different fundamentals and dynamics. 

Cargo arbitrage is based on optimizing the delivery of LNG shipments in order to maximize the profit margin by redirecting and reselling cargoes to high-priced demand destinations. Pricing LNG contracts using oil is increasingly becoming irrelevant as the industry moves forward in adopting GOG. Figures 1 and 2 illustrate how more countries are moving away from OPE as a pricing mechanism and adopting GOG instead.

One of the most important implications of the U.S. LNG exports is the rising influence of Henry Hub, which is the most active gas trading point in the world. It is both a physical and paper trading hub. Most LNG export projects are indexed to Henry Hub.² Cheniere, which is the largest U.S. LNG exporter and the second largest³ operator in the world, was the first U.S. supplier to introduce a Henry Hub-linked LNG formula.⁴   

This formula is based on off-takers that are contracted to lift LNG and pay an approximate fixed fee between $2.25 to $3.5 per MMBtu plus a charge of 115% of the Henry Hub price. The fixed “take-or-pay” fee is paid irrespective of lifted volume and can be considered as a “sunk” cost. The Henry Hub price and 15% charge represent the cost of procuring feedstock gas that is variable depending on the volume lifted. Shipping and re-gasification costs are covered by the downstream participant or off-taker. 

Given the destination optionality embedded in U.S. SPAs, off-takers can elect to take any contracted LNG if the economics of exporting gas or netback margins are favorable. The netback pricing is an important concept, and it is derived by estimating the net revenue from the sale of LNG in destination markets less all costs including sourcing, regasification and shipping etc.

Significant uncontracted U.S. LNG volume is owned by the portfolio optimizers. These aggregators are generally large energy companies, which own upstream assets and have long-term off-taking agreements. These aggregators are driven by margin optimization through engaging in short-term trading to capture price arbitrage using sophisticated strategies like buying cargoes on term contracts and selling on spot basis or vice versa. Their ability to raise capital at lower costs enhance their marketing capabilities and enables them to be the conduit between the primary market and the secondary or resale market. This has led to a progressive boost in the liquidity of LNG spot trading, also referred to as the swing market.

The rapid growth of LNG trading driven mainly by the portfolio players has created changes in how LNG is bought and sold, with more volumes than ever being traded through spot sales or shorter-term contracts.

U.S. natural gas is considered the most developed, liquid, mature gas market in the world. U.S. LNG terminals are not only exporting gas molecules but also exporting the successful American story of commodity trading with its apparatus and transforming the global gas market to become more commoditized, linked and competitive. 

1.  The raw natural gas supplied to LNG terminal for conversion to LNG
2. https://www.oxfordenergy.org/publications/a-brave-new-world-lng-contracts-in-the-context-of-market-turbulence-and-an-uncertain-future/#:~:text=Brave%20New%20World%3F-,LNG%20Contracts%20in%20the%20Context%20of%20Market%20Turbulence%20and%20an,unprecedented%20increase%20in%20LNG%20imports
3. https://www.cheniere.com/about/resources/suppliers-and-contractors#:~:text=Cheniere%20is%20a%20full%2Dservice,largest%20operator%20in%20the%20world
4. https://www.sec.gov/Archives/edgar/data/1383650/000138365011000079/cqp8-kgasnatliquefactionag.htm