Why U.S. LNG Exports are Surging
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Open Interest in LNG freight sets new highs

LNG OI

Henry Hub volatility spiked with cold snap

Henry Hub natural gas front-month prices have been generally weak due to mild weather conditions and record high production. However, January prices gained 5% compared to December 2023 as a January Arctic blast sent temperatures plummeting across the U.S. and Canada, pushing natural gas consumption to a new daily record high of 141.5 billion cubic feet (Bcf) on January 16. Uncertainty in the weather led volatility to spike to 99%, based on the CME Group Volatility Index (CVOL). The tool measures the expected implied volatility from options prices based on the collective market sentiment of future price moves.

Volatility in the LNG freight market is a frequent occurrence with rates impacted by short-term supply and demand factors in both the natural gas market and the availability of shipping. Looking at the volatility in the key U.S Gulf to Europe route, levels have fluctuated on a consistent basis. Typically, when there is higher volatility in a market, it will tend to prompt traders to hedge greater volumes via the futures markets. CME group data shows that the 30-day standard historical annualized volatility levels have been as high as 250% and as low as 50% in recent months. 

U.S Energy Information Administration (EIA) data shows that the U.S. became the world’s largest exporter of LNG, outpacing exports from Qatar and Australia. The U.S. exported around 90 million metric tons (MT) of LNG in 2023, which was around 15% higher than volumes exported in 2022. Part of the reason for the higher volumes was a return to full production for the Freeport LNG plant on the U.S Gulf Coast following an outage in 2022.

LNG Exports

New Headwind for U.S. Supply?

In January 2024, the U.S government announced a pause on new licences for export terminals. It is not clear what impact there may be on U.S. supply given the amount the U.S currently produces and with further projects already approved and slated to come onstream before 2030. Wood Mackenzie’s analysis suggests that LNG production volumes are enough to meet the combined gas requirements for Germany and France from existing production. 

The freight markets are expected to remain volatile in the coming months with prices fluctuating on a day-to-day basis. Natural gas demand is expected to remain strong in the European markets as the region continues to deal with the fallout from reduced Russian natural gas flows. These factors will be worth watching in the months ahead as market participants navigate the near constant changes.

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