The U.S. Is Setting The Price for Natural Gas around The World

At a Glance

  • U.S.-based Henry Hub pricing represents 86 percent of global gas futures trading
  • Increased shale production, LNG could further boost U.S. influence on gas markets

The global natural gas derivative markets continue to grow as the world turns to gas to bridge the transition to a low-carbon economy.

Power stations that use natural gas to generate electricity produce significantly fewer pollutants than generators that use coal.  Supply is growing to match the increased demand, with natural gas output surging around the world and particularly in the United States.

The U.S. shale revolution has unlocked gas deposits that were previously considered uneconomic to develop.  At the same time, the development of liquefied natural gas (LNG) technology and infrastructure has allowed gas to be produced and consumed in countries without the need for massive investment in cross-border pipelines.

The growth in international trade in natural gas has led to growth in related derivatives as producers and power companies use futures markets to hedge their price risk.  Natural gas derivatives totalled around 510,000 terawatt hours (TWh) in 2018, up almost 5 percent on the previous year.

Henry Hub Dominates

There are currently four key benchmarks for natural gas futures trade: Henry Hub in the United States and its associated regional basis markets, the Dutch TTF benchmark, the UK NBP benchmark and Platts JKM, which represents the import price for LNG in north Asia.

Within natural gas derivatives, Henry Hub remains dominant, both in terms of trading volumes and influence.  Henry Hub accounts for 86 percent of total natural gas derivatives traded globally, with the U.S. basis markets, whose price is linked to Henry Hub, accounting for an additional 6 percent.

The international markets are still a fraction of the size of the U.S. markets, totalling around 8 percent of global trade.  This split between U.S. and international trade has remained stable in recent years, with growth in the TTF coming largely at the expense of the NBP – the only natural gas benchmark that is in decline.  The Dutch TTF is currently the largest international benchmark, with over 5 percent of the total global market.

The fastest rate of growth is in the Platts JKM benchmark, from 37 TWh in 2016 to 536 TWh in 2018.  The potential of this benchmark is obvious, given the growth in demand for LNG from north Asia, but it still a minnow relative to the more established benchmarks, accounting for just 0.1 percent of global natural gas derivatives trade.

Trading Hub

U.S. dominance of global natural gas derivatives looks set to persist in the long term due to the huge volumes of gas being produced from onshore shale deposits.  This gas is increasingly finding its way into the global market in the form of LNG.

International traders are already increasing their participation in Henry Hub as they look to hedge U.S. LNG price risk.  And as U.S. Gulf Coast LNG set to reach more destinations in Europe and Asia, Henry Hub’s leading position is likely to be further enhanced.

is Managing Director of Energy Research and Product Development at CME Group. He is based in London.

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