CME to Launch Cleared Swaps for LNG (Singapore)
CME Group said ti will launch the world’s first cleared financial derivatives contract for liquefied natural gas Monday, in a bet that burgeoning gas trading will spur demand for such instruments.
The launch comes years ahead of an expected huge outflow of LNG from North America, which many in the industry view as a game-changing development with a potential to bridge regional gaps in pricing of the cleaner-burning fuel in the long run.
LNG use in Asia, already the biggest regional consumer of the product by far, looks to explode before that, though, as new import terminals are being built in countries such as China, India, Malaysia and Singapore, with these partly fed by a huge new outflow of gas from Australia.
“The world’s first cleared LNG swaps will assist market participants in hedging their exposure to LNG prices which have become increasingly volatile due to demand growth in Japan and South Korea,” said Alan Bannister, the Singapore-based director of energy products in Asia for CME.
Japan’s imports of LNG surged over 12% last year in the wake of the nuclear disaster there, and are set to grow even faster this year.
As with any new financial instrument, interest in LNG swaps among is hard to predict. And it is especially true for the LNG market, where much of the physical trade is still done through longterm contracts between buyers and sellers.
But the share of spot LNG is set to grow with the commissioning of new import and export facilities. In the 25 years to 2035, inter-regional LNG trade could grow to 290 billion cubic meters, with LNG holding about a 50% share in overall gas trade, the International Energy Agency said last year.
“As with other commodities, we expect a gradual transition from longterm off-take contracts to spot-based pricing, which makes this type of product useful to CME’s customers with LNG price exposure,” Bannister said.
Singapore is already seeing some LNG trading, with big names like Gazprom and ConocoPhillips setting up offices in the city-state. It harbors aspirations to become an LNG trading hub for Asia, and is building storage tanks to help it realize that ambition.
A flow of North American LNG in the second half of this decade thanks to the shale gas revolution will open up fresh arbitrage opportunities for LNG players to take advantage of price difference between markets, and this will help drive the need for derivative instruments to allow buyers and sellers to hedge.
LNG prices in Asia are based on crude oil and are therefore much more volatile and higher than gas prices in the U.S. or U.K.
U.S. gas prices have plummeted in recent years to $2-$3 per million British thermal units due to surging shale gas output, while Asian buyers pay about $16-$18/mmBtu for spot LNG cargoes.
“These contracts will also provide arbitrage opportunities to other natural gas contracts such as U.S. Henry Hub or U.K. NBP,” Bannister said.
The CME will begin trading four new LNG swaps from Monday, one each for the markets in East Asia, Iberia, the Mediterranean and North-West Europe.
The cash-settled swaps will have a contract size of 10,000 million British thermal units and will reference against ICIS Heren LNG indexes in the respective markets. The contracts will be cleared by CME Clearing Europe.
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LNG World News Staff, April 13, 2012; Image: MISC
