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CME, Cheniere to Develop Henry Hub-based LNG Futures Contract

In a sign that the liquefied natural gas (LNG) market is moving toward becoming a standalone component of the global energy mix, global derivatives marketplace leader CME Group and liquefaction/export pioneer Cheniere Energy Inc. announced on Tuesday an agreement through which CME Group will develop a Henry Hub-indexed LNG futures contract with physical delivery to the Sabine Pass terminal on the U.S. Gulf Coast.

CME Group spokesman Chris Grams said no product details were available at this time, and he could not provide a timeline for when the new LNG futures contract would start trading.

Cheniere's Sabine Pass LNG terminal first started exports in February 2016. The Houston-based company currently operates four trains capable of producing 18 million metric tons per year (mmty) of LNG. A fifth train is under construction and a sixth is fully permitted and “shovel ready”, representing up to 27 mmty at the site.

Cheniere is also constructing a separate LNG export facility outside of Corpus Christi, TX.

In recent years, the shale revolution has unlocked abundant supplies of natural gas here in the United States, creating new risks and opportunities for producers, processors, consumers and traders, said Peter Keavey, CME Group Global Head of Energy.

"Through its Sabine Pass liquefaction facility, Cheniere is delivering Henry Hub-indexed natural gas to the world in the form of LNG. This agreement with Cheniere is significant because it will be the foundation for developing a new LNG risk management tool for producers, consumers and traders around the globe, while further cementing the role of Henry Hub Natural Gas futures as the global gas pricing benchmark."

As U.S. Gulf Coast LNG is increasingly exported to Asia, South America and Europe, CME said there will be an increased need for producers, processors and end users to hedge their price risk. In addition to its liquid and established global benchmark Henry Hub Natural Gas futures and options contracts, “a physically deliverable LNG futures contract from CME Group is expected to help the industry manage price risk more effectively and efficiently,” it said.

An increase in derivatives trading, especially by overseas traders, is to be expected as gas-indexed contracts become more prevalent, and as U.S. LNG exports increase, the Commodity Futures Trading Commission (CFTC) said in May. The regulator said a lack of domestic production or pipeline imports in Japan, South Korea and Taiwan, aka JKT, has pushed these countries and others to rely on the spot market. With spot transactions on the rise, the CFTC said there will likely be an increased need for derivatives markets for hedging. 

Currently, natural gas is one of the major derivatives markets under CFTC regulation.

Meanwhile, executives gathered at the World Gas Conference (WGC) last month in Washington, D.C., said while LNG historically has been linked to oil, the time has come for the commodity to have its own marketplace. What is needed is a “true regional pricing model that really reflects the cost of supply,” Woodside Energy Ltd. CEO Peter Coleman told the group.

LNG executives also pointed to the need for liquidity and price transparency in the market, as well as supply contracts that offer flexibility. “How do we achieve a price marker for LNG that will simplify trade and defuse the very high risk?” Pavilion Energy Group CEO Frederic Barnaud asked. It’s not only balancing the risk and liability, “because contract prices diverge so much from the market price that it creates bias in the relationship...

“So this new fact is something we need to work on.” Pavilion, a Temasek subsidiary, is a pure-play global gas/LNG integrated player based in Singapore, and it supplies about one-third of all the gas consumed by Singapore industries. Subsidiary Pavilion Gas in April received its first LNG cargo, supplied by Qatargas, under a spot contract for delivery to downstream customers.

In perhaps a hint at Tuesday’s announcement, Cheniere Commercial Officer Anatol Feygin told WGC attendees that there is “burgeoning liquidity in global LNG but nothing compares to Henry Hub.” He noted that last year Henry Hub volumes were 50 times larger than the Japan Korean Marker, or JKM.

Last month, the Intercontinental Exchange (ICE) launched a physical trading product to reflect the changing market dynamics at the Cove Point LNG terminal in Lusby, MD. The new “Dominion Energy - Cove Point - on system delivery” product was begun on June 11 to reflect the physical market for deliveries into Dominion’s LNG terminal for liquefaction and export. The prior Cove Point market, which had been set up for receiving natural gas from LNG imports, was delisted simultaneously on ICE.

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