In 2016, Chevron started up its Gorgon liquefied natural gas (LNG) export facility. At the time, many energy analysts and observers were saying that this large facility and the wave of other new facilities about to start operations would overwhelm the global LNG supply to the point that prices would plummet and we should expect a market correction until the mid-2020s. Despite all of these doomsday declarations, the price for LNG did the exact opposite and had hit multiyear highs in recent months. 

If you ask U.S. LNG exporters, this isn't some strange market oddity or something more nefarious going on. Simply put, those high levels of supply are being absorbed by demand much faster than anyone anticipated. Let's take a look at why analysts got this so wrong and what it could mean for investors today.

LNG loading at terminal.

Image source: Getty Images.

It's the price, stupid

It wasn't that long ago that LNG wasn't so common a thing. Only a small handful of countries were producing enough gas to make it a commercially viable option, and the transportation costs made it prohibitively expensive.

The abundance of gas reserves in places like the U.S. and Australia, though, has significantly brought down the cost to produce LNG and has made it much more plentiful. According to Anatol Feygin, Cheniere Energy's (NYSEMKT:LNG) chief commercial officer, the U.S. and Australia have been the drivers of global LNG supply growth over the past year or so, adding around 11 million tons per year.

This is a lot of LNG in a single year, and whenever companies test the limits of a market, there are going to be people who think that it will not turn out well. According to Feygin, though, nearly all of that new supply has found a customer in short order, and it is keeping supply and demand in much better balance than initially anticipated.

[D]espite more than 11 million tonnes of new supply added to the market in the first half of the year, we're seeing extremely strong demand, mostly in Asia, keeping the market tight. As a result, prices this summer have sustained three-year highs at levels equivalent to winter-like prices. These price signals provide further evidence the market is calling for additional investment in LNG liquefaction infrastructure...

Cheniere isn't the only one saying these things, either. Royal Dutch Shell (NYSE:RDS-A) (NYSE:RDS-B) CEO Ben Van Beurden has noted several times on conference calls and at other speaking events that this supply glut hasn't materialized and that we're more likely to face a supply shortage as soon as 2020. That lack of excess supply is a significant reason management is now aggressively pursuing its $30 billion LNG Canada facility.

There are, of course, several reasons that all this LNG demand has come out of the woodwork, but there is one catalyst emerging that has sent LNG booming: pricing.

For years, LNG was a commodity that was bought and sold using contracts linked to oil prices. It wasn't necessarily the most effective way, but there was so little trading between suppliers and buyers that it was the best option available at the time. As companies built these facilities, though, they have had a small number of cargoes not covered under these contracts that they could sell to any buyer. This created a trading market for LNG in relatively short order, and the ability to buy cargoes of LNG on a spot market has been incredibly lucrative. It is a driving factor for Cheniere Energy and a key reason it has wildly outperformed expectations as it ramps up operations.

This phenomenon has led many executives in the LNG business to say the industry should do away with oil-indexed pricing and that trading hubs should be set up around the world to handle all of these spot-market deals. Strong demand for LNG over the past few years certainly supports that idea.

Why it matters to investors

You and I aren't going to be trading LNG cargoes on some international spot market anytime soon, so at first glance, this doesn't look like a big deal for individual investors. What this small change in how companies trade LNG does do, though, is open up many more opportunities in the U.S. for LNG export.

U.S. natural gas is some of the lowest-cost gas in the world, and it could get even cheaper as oil-centric producers start to monetize the associated gas that gets produced with oil. This incredibly cheap feedstock makes the U.S. one of the most attractive places to build an LNG export facility, even though it costs a bit more to transport it. 

As it stands, there are 11 projects in the lower 48 awaiting regulatory approval within the next year. Combined, they represent 100 million tons per year of export capacity. Some of them are expansions of existing facilities such as Cheniere's Sabine Pass and Corpus Christi terminals, but it also includes new-build facilities from new companies such as Tellurian's (NASDAQ:TELL) Driftwood LNG and NextDecade Corporation's (NASDAQ:NEXT) Rio Grande LNG. If these companies get regulatory approval, then they could have monster years in 2019.

As both the shale drilling industry in North America and the global market for LNG mature, it puts U.S.–based LNG exports at a distinct advantage over many other players around the world. That could bode well for investors who dig into this industry before this next giant wave of LNG investments hits the U.S.