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Buying and selling on the up

Increased spot and short-term LNG trading and sharp price moves have encouraged the global growth of derivatives trading and hub activity

Price reporting services over the past year have witnessed increased interest in the use of indices to price liquefied natural gas in the Asia-Pacific region, which dominates world LNG consumption. S&P Platts says swap volumes linked to its Japan Korea Marker (JKM) price index continue to rise. It recently reported that the volume of LNG swaps cleared on the Intercontinental and Chicago Mercantile Exchanges hit a new monthly record in April, at 17,181 lots, up 57% from 10,830 lots in March. JKM swap-trading volumes quadrupled in 2017 from 2016.

Market participants hesitate to conclude from rising derivatives volumes that the Asia-Pacific financial LNG market is ready to stand unaided, noting that the smaller, but more liquid, European Union gas markets still drive much Asian pricing. Traders say up to 25% of traded Asian LNG, whose prices aren't linked to oil, is bought and sold based on the UK National Balancing Point, the Northwest Europe Title Transfer Facility, or US Henry Hub pricing. But Platts does appear to have seen off competition from other price reporting services to emerge as the region's dominant index.

Asian markets are also evaluating where a physical LNG trading hub might emerge. Singapore, China's Shanghai, and Japan are all seen to be in the running. Many believe Singapore is the early leader, with its history as a financial and oil trading centre, operating gas and power markets and available storage all supporting its candidacy. Japan and China are working on developing LNG trading, but neither has yet put in place what traders say are the prerequisites for a viable gas market.

Japan, though the world's largest LNG importer, lacks liquidity and a national gas transmission system. Meanwhile, China, which has a developed transmission system and its own gas production, appears reluctant to dismantle domestic price control. Also, its focus on gas for industry and heating rather than power generation suggests a more gradual expansion than traders would like to see.

In the EU, trading activity around European gas hubs has continued to increase this year, according to Pegas, the gas trading unit of European Energy Exchange. It reported that activity on its gas trading platform reached a record 147.7 terawatt hours in April, up 19% from a year earlier, after 14% growth in 2017 from 2016. In southern Europe, Spain and Italy continue to attempt to closer link their Mercado Ibérico del Gas (Mibgas) and Punto di Scambio Virtuale markets to the more liquid North European Title Transfer Facility market. Mibgas is expanding into LNG and storage terminal products, and the Italian government is trying to lower transmission costs for gas importers. Spanish LNG terminal Reganosa is marketing itself as a physical market hub.

In the Atlantic Basin LNG market, US LNG exports have spurred interest in derivative products. These are useful in hedging transatlantic price differentials and the basis risk between US domestic gas hubs and liquefaction terminal deliveries for gas tollers. Price reporting services, including S&P Platts, ICIS/Heren and Argus Media, already publish FOB US Gulf-assessed prices.

Increased LNG spot trading has influenced the shipping market and its indices. LNG shipping was long dominated by long-term charters on fixed routes between liquefaction plants and regasification terminals. But the rise of short-term LNG contracting and single-cargo sales has encouraged London's Baltic Exchange to consider establishing an LNG Index. An Exchange working group is evaluating routes for inclusion in an index.

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