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Asian market deregulation, expanding forward curve to drive LNG derivatives growth

Increase font size  Decrease font size Date:2020-10-30   Views:50
An expansion in the trading horizon for LNG over several years, as well as the ongoing liberalization of gas and power markets across Asia will drive further growth in LNG derivatives trading, industry participants said on Oct. 27.

This is expected to have a ripple effect on the use of other energy risk management tools like Japanese power futures and LNG shipping freight forward agreements, pr FFAs, signaling wider development of the financial side of the LNG market that is critical to its long-term commoditization.
These financial instruments also highlight the role of interconnected markets in creating the ecosystem for LNG trading that will eventually comprise electricity trading on commodity exchanges, hedging for risk on shipping futures, arbitrage between different natural gas benchmarks and even competing fuels like coal, or future markets like carbon, hydrogen and weather derivatives.

There is a significant increase in LNG derivative trading tenures to three to five years during Asian hours, as well as greater trading of cross commodity spreads like JKM/TTF, JKM/Henry Hub and JKM/Brent, Varun Gujral, Head of Energy Sales in Asia Pacific, ENGIE said during the 6th Annual S&P Global Platts LNG & Hydrogen Markets Asia virtual conference.

"It is a testament to how the commoditization of LNG is happening, towards more shorter term, price transparency, as well as indexation of LNG which is being more and more used in the trading of the cargoes," Gujral added.

JKM derivatives trading has been brisk lately, with daily volume on the Intercontinental Exchange, or ICE, averaging at 3,600 lots as of Oct. 26, equivalent to 10-11 LNG cargoes. A daily record of 8,416 lots was also traded on Oct. 22, according to ICE.

One growth opportunity for JKM derivatives James Whistler, Global Head of Energy Derivatives at Simpson Spence Young, mentioned was the development in downstream markets. "JKM is a real enabler for [FFA and Japan power futures] markets that we are seeing develop ... [the growing Japan power futures market] will pull JKM activity into Asian time, and be more of an outright JKM against Japan power," Whistler said.

He added that new Australian LNG import projects expected to reach final investment decision could also boost the risk management activities within Asia.

JKM derivative trading volumes cleared on financial exchanges ICE and the Chicago Mercantile Exchange over January-September increased almost year on year to about 115 million mt. This compares with 107 million mt in the whole of 2019, according to exchange data.

Furthermore, the impact of deregulation of Asian downstream markets would mean that the traditional model passing the costs of LNG downstream would be something of the past, and these utilities might have to explore more risk management strategies such as hedging, or start actively trading as a supply and trading business, Tobias Davis, Head of LNG in Asia, Tullett Prebon, said.

Nevertheless, positive shifts have been observed which include some of these utilities establishing operations in London, purchasing assets in Southeast Asia and the US, setting up trading and derivatives desks in Singapore, he said.

Earlier this week, Frédéric Barnaud, Group Chief Executive Officer of Pavilion Energy said the Singapore-based company was already a leading financial trader for energy hedging, portfolio optimization and risk management, and that its carbon-neutral LNG tender would pave the way for carbon pricing in the city-state.
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