U.S. Gulf Coast LNG

Description

Gulf Coast LNG (GCL) futures contract is the first-ever U.S. liquefied natural gas (LNG) futures contract. It was launched by Intercontinental Exchange in May, 2017. GCL trading unit is USD per million British thermal units ($/MMBtu) and the minimum contract volume is 10,000 MMBtu.

The first chart plots the performance of GCL futures contract (bright orange curve) against the performance of natural gas prompt month futures contract (NYMEX Henry Hub - bright blue curve).

The second chart shows the spread (bright orange curve) between the GCL price and the price for natural gas prompt month futures contract (NYMEX Henry Hub). It also displays the long-term average spread (light orange curve). Additionally, the chart plots the performance of HH futures (bright blue curve) on the secondary (right) axis.

Historical data are available from May 4, 2017.

The charts are interactive. You can click on any series in the legend to hide/show the data. You can also click on the chart and drag out a specific area you wish to zoom. Alternatively, use calendar filter to select a specific data range. Also, to print or download the chart, click on the "menu" button in the top right corner of the chart.

Update: every weekday + Sunday afternoon.

Source: CME Group, ICE, Bluegold Research calculations

Trader's Note

Natural gas is a naturally occurring hydrocarbongas, while LNG is a "man-made commodity". There is a cost associated with converting dry natural gas into liquid natural gas and then getting it onto a vessel. These costs are often referred to as "liquefaction costs". The liquefaction cost is specified in most US export contracts at 115% of gas cost - i.e., NYMEX HH prompt month futures contract price multiplied by 1.15. Therefore, the price of GCL futures contract is always higher than the price of HH futures contract. In addition, GCL price may also reflect other factors, such as open interest, global LNG supply/demand trends and changes in LNG and natural gas prices elsewhere in the world.

The need for a liquid LNG benchmark has been the subject of much debate. The most established derivative contract for LNG by far is ICE's Japan-Korea Marker, launched in 2012. Traditionally, LNG has been almost exclusively valued relative to crude oil and brought and sold under long-term contracts. However, the expansion in global supply, most notably with the development of shale reserves that transformed the U.S. into a major natural gas exporter, has opened up other options and stimulated a shift to more spot trading. LNG indexation is evolving from its historical oil-based benchmarks to include natural gas hub benchmarks. The U.S. Henry Hub (HH) contract has an important role to play in this process. Already, the contract is helping to set prices from Mozambique to Japan, as a wave of U.S. natural gas being unlocked by shale drillers reaches Europe, South America and Asia.

The correlation between GCL and HH futures is yet to be fully researched. There is not enough historical data available to come to any sensible conclusions. One option, however, is to use GCL-HH spread to find anomalies. So, for example, if we assume that financial indicators must eventually converge with a long-term average, then we must also conclude that:

• when GCL-HH spread is too high (relative to its long-term norm), then either LNG price has to fall or HH natural gas price has to rise;
• when GCL-HH spread is too low (relative to its long-term norm), then either LNG price has to rise or HH natural gas price has to fall.

Related charts: European Hubs