As natural gas markets become increasingly global, market participants are evolving their trading and risk management strategies to manage portfolios with regional and global exposure. To support this shift, exchanges are developing new futures and options contracts that meet the needs of the dynamic natural gas markets. At ICE, we’ve led the charge to become the premier exchange offering a full range of natural gas hedging and trading tools across international markets – a move that offers a unique view into the globalization of natural gas markets. Here are some of the trends we saw in the first half of 2017.

Increased global relevance is driving continued growth in the LNG futures market

The markets for liquefied natural gas (LNG) are changing:

  • There are more buyers and sellers of LNG over a more diverse geography
  • The threat of oversupply means that buyers are demanding more flexibility in the tenor of contracts
  • LNG pricing is evolving to include natural gas benchmarks
  • Oversupply of LNG fosters liquidity in the spot markets allowing for further indexation optionality

These are contributing to the globalization of natural gas markets. 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. We also launched the first U.S. LNG futures contract in May, the ICE Gulf Coast LNG futures contract, which provides buyers and sellers with an effective means of hedging, and is cash-settled against the Platts LNG Gulf Coast Marker, a value for pricing U.S. Gulf Coast LNG in the international market.

ICE JKM H1 volumes up 307% YoY and Open interest Up to 272% YoY equal to 44 LNG Cargoes
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Supply and demand driving increased activity in U.S. regional gas markets

The strong open interest and volume growth we saw in ICE’s U.S. natural gas markets during the first half of 2017 suggests that market participants are taking a more focused look at regional markets, where supply and demand factors are coming into play. Regional markets often have constraints, such as limited pipeline capacity and infrastructure support, which in turn limit transportation of the commodity. Price changes in these types of regional natural gas markets can be driven by the availability of pipelines rather than the gas itself, which results in seasonal swings. Regional markets can be more volatile, and therefore drive increased hedging.

US Daily volume of regional futures up 17% YoY
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Increased demand for liquid, exchange-traded products continues to evolve global benchmarks

When it comes to existing benchmarks and the introduction of new products in European natural gas markets, there’s strong demand for access to liquid, exchange-traded contracts that provide for hedging and exposure to both global and regional markets. A few of the key dynamics we saw in the first half of 2017 include:

  • The ICE NBP futures contract, which is the most liquid natural gas exchange market in Europe, is viewed as a key benchmark for global gas markets as a result of its location and significant LNG infrastructure, which is driving record levels of open interest in the contract.
  • In addition to the growing use of TTF as a benchmark futures contract, culminating in our most active futures month ever in March, we’re also seeing increased interest from counterparties in clearing their options to reduce their operational risk. Trading in ICE TTF options contracts increased in the first half by 11%.
  • Growth in our newest European natural gas contract, ICE PSV futures (which launched in September 2015), has been steady as participants become increasingly active in the Italian gas market. Italy is the third largest European natural gas market in terms of demand due to the high percentage of natural gas in the fuel mix for electricity generation.

Record volume and open interest for PSV, HBP, TTF futures and options
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Growing demand for NGLs is driving trading and hedging activity

There are several factors behind the growing demand for natural gas liquids, including:

  • Continued expansion of the shale gas market, which will likely continue for the next 5-10 years
  • A wide variety of uses for NGLs from propane in the plastics industry to synthetic rubber for tires
  • The affordability of NGLs, which drives demand for the product
  • The increased ease of shipping, which adds a cost efficient component

As these factors drive the demand for NGLs, we’re seeing increased activity in the NGL futures market as participants seek trading and hedging opportunities. NGL trading volumes continued to rise in the first of 2017, with24% year-over-year growth.

NGL
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