After years of relative isolation, US benchmark natural gas prices are now playing a significant role in shaping global LNG market contracts. The Henry Hub price in the US is becoming increasingly influential in determining regional LNG and natural gas prices in Asia and Europe. This shift is driven by the rising scale of US LNG exports and the growing share of American LNG in the imports of these regions. Buyers are now comparing Henry Hub-indexed long-term contracts from US shale production and export projects with oil-indexed contracts from conventional LNG projects. Currently, Henry Hub-indexed contracts are more attractive due to their lower cost and the flexibility they offer in cargo destinations.
However, if Henry Hub prices experience a structural increase in the coming years, the appeal of these contracts may diminish, particularly if there is a plentiful global supply. US natural gas prices could rise more than expected over the next decade due to increased domestic demand from the power sector, which will need to supply electricity to data centres. The flexibility of US natural gas producers will be crucial in maintaining a balanced domestic market.
Regardless of the future Henry Hub price, it will remain a key driver in global LNG market contracting and pricing. With Europe seeking LNG to replace Russian pipeline gas and Asia looking for additional gas supplies, US Henry Hub prices are now interconnected with the global market.
The US LNG supply is set to play a pivotal role in the upcoming global supply wave from 2025-2027, with significant export increases expected from the US and Qatar. North American LNG supply’s market share is projected to rise from 22% in 2023 to 34% by 2030, with volumes growing by 116 mtpa, according to London-based consultancy Timera Energy. They highlight that the variable production cost of North American liquefaction capacity is closely tied to the Henry Hub price, increasing its influence on the global LNG market over the next five years. While Henry Hub prices have diverged from LNG prices in Asia and Europe since 2020, this is expected to change by 2026, as new global LNG supply ramps up.
US natural gas prices have remained relatively low in recent years, except for brief spikes during winter freezes, despite the continued growth of US LNG exports. This is largely due to the flexibility of US natural gas producers who adjust output in response to market demand and conditions. For example, earlier this year, producers cut output due to multi-year low prices but are preparing to increase output by managing their inventory of wells as soon as prices rebound. Producers expect US natural gas prices to recover next year with growing demand for LNG exports and new export plants set to begin operations in 2025.
In the medium to long term, three key risks could affect the flexibility of US natural gas producers: a potential decline in shale quality, rising capital costs, and a significant increase in US LNG exports. Additionally, increased US gas demand from data centres could push up Henry Hub prices. Analysts, including those from Wood Mackenzie and Goldman Sachs, foresee significant growth in gas demand driven by data centres and AI, which will require more gas-fired power. Wood Mackenzie now anticipates total US gas demand to rise by 30 bcfd by the early 2040s, compared to a previous forecast of 13 bcfd growth. Goldman Sachs projects that incremental data centre power demand could add 3.3 billion cubic feet per day of new natural gas demand by 2030, representing a substantial increase from prior growth expectations.
The US benchmark natural gas price is no longer an isolated figure but a crucial factor influencing the global LNG market. The interplay of domestic demand, global supply, and flexible production will determine its future role and impact on international contracts.
Diversified Energy Company plc (LON:DEC) is an independent energy company engaged in the production, marketing, transportation and retirement of primarily natural gas and natural gas liquids related to its U.S. onshore upstream and midstream assets.
