Globalizing natural gas market drives liquidity in LNG futures
By Gordon Bennett, Managing Director, Utility Markets, ICE
The way liquefied natural gas (LNG) is bought and sold is changing. There are more sellers of LNG over a more diverse geography, and the threat of oversupply means that buyers are demanding more flexibility in the tenor of contracts. Furthermore, LNG indexation is evolving from its historical oil based benchmarks to include natural gas hub benchmarks.
As supply expands, this should also promote the establishment of a liquid LNG spot market allowing for further indexation optionality.
At ICE, we’re seeing these factors combine to drive increased demand for LNG futures that enable the effective execution of risk management and trading strategies. In the first half of 2017, traded ICE JKM futures volume rose over 300% as the contract’s global relevance grew, driven by changing market dynamics.
In August volumes in the contract were close to the equivalent of a cargo of LNG a day. With attention turning to the impending northern hemisphere winter, new participation helped drive volumes up to record levels of 6,405 lots. Whilst at the same time open interest climbed steeply pushing through the 10,000 lot mark.
ICE launched the first-ever LNG future in 2012, which was a cash-settled futures contract based on the Platts Japan/Korea Marker. Over the past 12 months, we’ve seen a surge in the volume of JKM LNG futures traded as the contract is increasingly seen as the benchmark contract for Asian LNG.
The growth in volume and the resulting increase in liquidity can be attributed to a number of factors around the changing dynamics of the LNG market, including the potential for the globalization of natural gas markets.
(Volume and Open Interest for the ICE JKM LNG contract since January 2015)
ICE offers a wide array of liquid energy benchmarks across oil and natural gas to enable customers around the world to hedge their exposure to price risk as natural gas markets become more global and connected.
In May of this year, building on the success of our JKM futures contract, we launched the first US Gulf Coast LNG futures contract, which is cash settled against the Platts LNG Gulf Coast Marker and designed to support the new wave of US Gulf Coast LNG exports. These LNG contracts are complementary to our leading North American and European natural gas product complex.