Adila McHich and Cameron Liao, CME Group
At a Glance:
- Henry Hub Natural Gas futures volume during Asian hours has averaged around 34,000 contracts per day in 2024
- The Energy Information Administration (EIA) estimates that U.S. LNG exports will rise by 2% this year, and 18% next year
As Asia strives to cut back carbon emissions by reducing its reliance on coal, liquefied natural gas (LNG) has emerged as a leading transition fuel that could pave the way for the United States to play a crucial role in the region’s energy landscape.
LNG represents an important substitute which offers sustainability, diversification and energy security to Asia, home to more than half the world’s population. The region is reliant on LNG imports as growing energy demand outpaces supply.
LNG is a cleaner burning fuel, producing up to 50% less carbon dioxide than coal and 30% less than oil. A Berkeley Research Group four-year study found U.S. LNG greenhouse gas emissions are 53% lower than coal on average and 63% lower than pipeline gas from Russia and Turkmenistan. The study tracks lifecycle emissions for U.S. LNG, pipeline gas and coal throughout the supply chain from upstream production through liquefication, shipping and then use in power generation in China, India, South Korea, Japan and Taiwan.
Industrial coal-to-gas switching is considered one of the main drivers behind the gas demand growth in Asian countries. Oil company, Shell, stated in its annual report, estimated LNG to be the key gas supply source to meet the strong demand from emerging Asian countries, with volume growing at a compound annual growth rate (CAGR) of 5.1% by the end of 2040.
The U.S. as the Top LNG Supplier
The shale revolution in the late 2000s/early 2010s fundamentally changed the U.S. natural gas industry. U.S. gas production has since grown rapidly, with annual volume increasing from about 22 trillion cubic feet (Tcf) in 2010 to 41 Tcf in 2023, according to EIA data. At the same time, the U.S. also turned into an important gas exporter with expanding LNG liquefication capacity. In fact, in 2023, the U.S. became the world’s largest LNG exporter, surpassing Qatar and Australia.
A substantial amount of U.S. LNG is now consumed by major economies in the APAC region. EIA data shows that U.S. LNG exports to Asia have grown significantly from being almost nonexistent in 2016 to a peak at 1.68 Tcf in 2021, accounting for almost 50% of total U.S. exports.
Russia’s invasion of Ukraine in February 2022, and the consequent sanctions, changed global gas trade flows. Europe embarked on a mission to reduce dependency on Russia pipeline gas and turned to the global LNG market for alternate supply in competition with Asia. This impacted LNG availability for Asian consumers and as a result U.S. LNG exports to the region have since declined to about 1 Tcf per year. Even so, Asia remains a key destination for U.S. LNG cargoes, representing about a quarter of the market share.
Non-U.S. Hours Liquidity
With considerable amounts of U.S. LNG exports still heading to Asian consumers, the liquidity in CME Henry Hub Natural Gas futures during Asian hours, defined as 8 a.m. to 8 p.m. Singapore time, has been growing. Volume during Asian hours now averaged close to 34,000 contracts per day, which represents about 7% of the global volume in the first five months of 2024.
When looking at activity by hour during Asian trading hours, volume showed a tendency to concentrate around the opening hours. Activity also tends to increase approaching the Asian afternoon when the European trading day begins, with more firms participating in the market. In general, there is steady participation observed throughout the Asia trading day, with at least about 1,000 contracts changing hands per hour, and averaging an hourly volume of 2,800 contracts.
When East and West Meet
U.S. LNG exports are projected to grow 2% in 2024 from last year, followed by a potentially significant rise of 18% in 2025 as new export terminals start operations, according to the EIA. The U.S. is also expected to continue as the swing supplier in the global LNG market. At the same time, growth from Asia economies and the demand for gas as a coal-replacing fuel will continue to position Asia as a key LNG demand center, and the U.S. will likely be an important supply source to meet that demand. With more U.S. LNG headed to the region, the relevance of Henry Hub as a key natural gas pricing mechanism could increase for global trades, potentially making it more relevant than ever in price risk management for Asian market participants.