LNG spot trading on a roll
Growth in “true” LNG spot trading is set to continue, with an emergent role for portfolio players and traders
Spot and short-term LNG recorded an impressive increase in occurred in 2018—rising from 27pc of global physical trade the previous year to 32pc. But that headline figure masks a trend of arguably much greater significance.
The latest annual report from LNG importers' group GIIGNL shows that 'true' spot trading has been rising rapidly since 2016. And the signs are that this surge is set to continue for at least another couple of years as additional more flexible production capacity comes on stream, especially in the United States, and as long-term contracts expire.
Not only is this rise a sign of growing liquidity in physical LNG trading—as the industry moves ever closer towards commoditisation—it also highlights the industry's increasing sophistication. It really is moving away from rigid long-term contracts, often incorporating anti-competitive destination restrictions, to the more flexible future that buyers have been demanding.
The distinction between 'spot and short-term' trading and 'true' spot trading matters. GGIGNL defines 'spot and short-term' as contracts with terms of four years or less, while 'true' spot is defined as contracts where delivery takes place 90 days or less from the date of the transaction.
The latter requires greater capabilities from sellers and buyers because of the complexities of completing a trade within a three-month window—with all that that entails in terms of booking shipping and regasification slots, and ensuring that cargoes meet quality requirements.
The rise in overall short-term and spot trading is itself significant, not only because this is the first time the 30pc barrier has been broken, but also because it is the largest increase in percentage points terms since 2011, the year of the Fukushima nuclear accident in Japan and the ramping up of the last of the six 'mega-trains' in Qatar. Its share of global trade has been moving up and down within a narrow band ever since, not least because overall trade flat-lined between 2011 and 2015, a period when little new supply capacity—the main driver of LNG growth—came on stream.
The real growth since 2016 (when GIIGNL began publishing data for both spot and short-term trading) has been in spot. Indeed, its rapid growth in 2017 was masked by a 30pc+ decline in short-term trade.
That growth becomes even more significant when the overall growth of the LNG market is considered. True spot trade grew from 20pc of the market in 2017 to 25pc in 2018, but the overall market was itself 8.3pc bigger, having grown from 290mn to 314mn t—the third-largest annual increase ever. Spot trade in volumes terms reached 79mn t, up 67pc from 47mn t in 2016.
The rise in spot and short-term trading is attributed by GIIGNL mainly to the ramp-up of flexible volumes from the US and Russia, and the growing volumes of LNG handled by portfolio players and traders 'who are able to optimise their portfolios by purchasing and selling LNG on different contact durations'.
Qatar share down
One consequence is that Qatar's share of the spot and short-term market fell from 20pc in 2017 to 12pc in 2018, putting it in third place behind Australia and the United States. Historically, it had been the leading supplier of flexible volumes.
The liquidity of the LNG market will be further enhanced in 2019 and 2020, says GIIGNL president Jean-Marie Dauger, as more liquefaction capacity comes on stream in the United States, adding 'substantial destination-free and non-oil-indexed' volumes.
However, despite the significant increase in spot and short-term transactions, he cautions that industry players 'will need to become more innovative and efficient in trading' and embrace the opportunities presented by digital technologies.
The industry may be getting more sophisticated—but commoditisation is still some years away yet.