Traders play their part in LNG market maturity
Alongside the traditional buyers and sellers, the industry’s middlemen are making a contribution to greater efficiency
The past five years have been a period of significant growth for global LNG markets. The old model of producer-to-supplier trade flow has changed, and several expert trading companies have increased their presence in the sector through enhanced capabilities and a growing network.
Physical LNG volumes traded on a short-term basis have roughly doubled to 130-150mn t/yr since 2015, while volumes of JKM swaps derivatives traded have been increasing roughly threefold every year across the same period.
The growing participation of expert trading companies in LNG markets should bring significant benefits to the sector. More active participation from majors, such as Shell, Total and BP, NOCs including Qatargas and Malaysia’s Petronas, as well as end-users like Japan’s Jera and South Korea’s SK—alongside the trading experts—has significantly enhanced the ability of the market to optimise flows.
A more optimal and efficient physical market has evolved, alongside reduced shipping costs and emissions
Trading activity has helped to increase liquidity in both the physical and derivatives markets. This is underlined by the strong increases in liquidity in the aforementioned JKM swaps, with trading companies among the most active players in this paper market. The startup of price reporting agency S&P Global Platts’ market-on-close window has also seen strong support and participation from trading experts, giving the entire sector a transparent view of physical bids and offers for the first time.
This greater level of trading activity can help create a more efficient and transparent marketplace, in which prices move to better reflect short-term changes in demand and supply, thereby increasing the total benefit for the market and for the individual companies that participate. Ultimately, this should benefit LNG producers and consumers; in giving greater visibility of prevailing market prices, it offers more opportunity to purchase or sell cargoes at a price level linked to LNG fundamentals, rather than one that is indexed to prices of other commodities.
A more optimal and efficient physical market has evolved, alongside reduced shipping costs and emissions. Global physical trade flows are now starting to respond more effectively to fluctuations in demand and price levels between regions.
Increasingly, cargo flows are responding more closely in real-time to changes in Asian versus European prices, with some cargoes even diverting multiple times on the water mid-voyage to alter the destination of the cargo. This dynamic is a great improvement on fixed point-to-point contractual trade flows, which are often based on inflexible and opaque contract terms that fail to respond to fluctuations in regional demand.
130-150mn t/yr – Physical LNG volumes traded on short-term basis
At Vitol, we anticipate that the demand for flexible capabilities will continue to increase, most notably among LNG-consuming countries. The advent of renewable energies and the shifting nature of energy policies in many countries are leading to an unprecedented level of future demand uncertainty.
This is further compounded by downstream market liberalisation efforts underway in many East Asian countries, which have attracted new market entrants and created greater uncertainty regarding the future market share of many incumbents. Due to their ability to manage complex price and credit risk exposures, trading experts may be able to offer more innovative and flexible structures, enabling buyers to mitigate these new risks.
We are also seeing an expansion of traders into upstream liquefaction projects as well as downstream regasification and demand. At Vitol, our capital investments in this space demonstrate our long-term commitment to the LNG market and have facilitated the entry of new countries into the LNG sector. Many of these projects will contribute to the global energy transition required to reduce emissions, accelerating the pace of transition away from highly polluting sources of power generation like coal, towards cleaner-burning gas and renewables.
Ultimately, while many companies are now active to some extent in the global LNG marketplace, only those with a sufficiently strong balance sheet and investment grade rating, as well as a long-term view, will be able to secure and retain the full confidence of the market, enabling them to build up a more significant portfolio. Vitol has been an active participant in the global LNG sector since 2005 and has moved to establish significant positions across the entire value chain, with many long-term contracts, terminal investments and significant experience in gas-to-power generation.
We are working with a range of stakeholders to provide an innovative and efficient approach that is tailored to the needs of individual customers. By leveraging our robust balance sheet and strong reputation, Vitol is taking a long-term and strategic approach to expanding its LNG activities, growing its participation in line with the overall expansion of the market. The long-term future looks bright for LNG markets across the coming decades, and Vitol is committed to playing a key role in helping to further develop and improve the overall functioning of the global sector.
Pablo Galante Escobar is global head of LNG trading at Vitol