The Future Is Now for LNG as Derivatives Trading Takes Off
Comment of the Day

January 21 2019

Commentary by Eoin Treacy

The Future Is Now for LNG as Derivatives Trading Takes Off

This article by Stephen Stapczynski and Dan Murtaugh for Bloomberg may be of interest to subscribers. Here is a section:

About 27 percent of LNG was sold under spot- or short-term deals in 2017, up from 12 percent in 2003, according to the International Group of LNG Importers.

That just increased the need for a reliable price benchmark and liquid futures market for hedging. Regional gas benchmarks such as Louisiana’s Henry Hub, the U.K.’s National Balancing Point or Dutch Title Transfer Facility reflect local fundamentals and therefore may not be ideal proxies for the global LNG trade, where the vast majority of sales are in Asia.

So that’s where LNG futures come in. JKM “is much more trusted, much more accurate, and the
paper market is helping make it be more responsive to price movements,” Gordon D Waters, the global head of LNG at ENGIE, said by phone on Friday. JKM contracts could reach the level of NBP or TTF “most likely within the next 5 years.” NBP and TTF volumes both averaged about 37,000 contracts a day in 2018.

There’s still a long way to go. ICE JKM is still much smaller than other global oil and gas benchmarks. Exchange open interest, or the amount of outstanding bets at the end of every day, accounted for about $2 billion at the end of 2018, compared with $36 billion for U.S. natural gas and more than $100 billion for Brent oil, according to Bloomberg estimates.

Eoin Treacy's view

It is only a matter of time before natural gas is a futures traded international market. LNG infrastructure continues to be built out. Canada in particular needs another export avenue while Australia is also now a major exporter, as is the USA. Meanwhile Europe, Japan and much of Asia are major demand growth centres. It makes sense this is going to be a major market.  

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