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CME and Cheniere to develop first US LNG futures contract

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Reuters are reporting that CME Group Inc has announced that it will develop the first physically deliverable US LNG futures contract as growing worldwide demand has made the US a key LNG exporter.

CME said the contract will take delivery at Cheniere Energy Inc’s Sabine Pass LNG export terminal in Louisiana. It could not say when it will launch the new product or provide details other than that it will trade on the CME’s New York Mercantile Exchange (NYMEX) like its Henry Hub natural gas futures.

Overall world LNG consumption has risen to a record 39.0 billion ft3 per day in 2017 from just 29.1 billion ft3 per day in 2010 and is expected to keep growing by about 3% a year through 2050, according to US energy data.

While LNG trade on exchanges like the CME is still small, experts believe volumes will increase rapidly in the near future as the US becomes one of the world’s biggest LNG exporters.

Total US LNG export capacity is expected to rise to 10.1 billion ft3 per day of gas in 2020 from 3.8 billion ft3 per day now, making the country the third-biggest LNG exporter in the world by capacity in 2019. 1 billion ft3 is enough to fuel about 5 million US homes for a day.

“We have spoken to the market and they have expressed a desire to have a physically delivered LNG contract that can help them manage price risks,” said Peter Keavey, global head of energy at CME.

Pricing at Cheniere’s Sabine Pass is currently linked to the Henry Hub gas benchmark traded on CME’s NYMEX. Sabine Pass was the first terminal in the US lower 48 states to produce and deliver super-cooled LNG for export to the world.

Cheniere is the biggest buyer of gas in the United States, consuming over 3.1 billion ft3 per day, and is expected to increase purchases as more liquefaction trains at Sabine Pass and its Corpus Christi LNG export terminal enter service. The company’s current consumption represents almost 4 percent of total projected US gas production of 81.3 billion ft3 per day in 2018.

“With Cheniere behind the CME futures contract...the odds would favour the CME contract especially if Cheniere immediately starts to sell its LNG on a Sabine Pass contract basis,” said Dominick Chirichella, director risk management, trading and advisory services at EMI DTN in New York.

The LNG market is in transition with a shift from long-term towards shorter-term contracts. Current users of LNG derivatives include big commodity trading houses like Trafigura, Vitol and Gunvor.

“I would surmise that in say five years there will be robust derivatives markets in LNG,” said Craig Pirrong, a finance professor specializing in commodities at the University of Houston.

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