Reuters: Regulatory News: LNG over-the-counter swaps volume ready to grow

Reuters: Regulatory News Reuters.com is your source for breaking news, business, financial and investing news, including personal finance and stocks. Reuters is the leading global provider of news, financial information and technology solutions to the world's media, financial institutions, businesses and individuals. // via fulltextrssfeed.com

LNG over-the-counter swaps volume ready to grow Sep 7th 2012, 18:19 By Mike Kentz Fri Sep 7, 2012 2:19pm EDT Sept 7 (IFR) - The market for over-the-counter swaps on liquefied natural gas looks set to flourish as exchanges increase their product offering in a sector where demand is expected to double over the next decade. Last week, ICE launched cleared contracts based on the Platts Japan/Korea Marker price indicator, which reflects the daily open-market value of spot LNG delivered to Japan and South Korea on a daily basis. Launched in 2009, it has since become a leading benchmark reference for the industry in calculating price differentials for Asia-Pacific supply and is increasingly used in outright contract pricing. Available in 10,000 MMBtu (million metric British thermal units) contract sizes, expirations are available out to 24 months. CME Group launched its own Platts JKM contracts early in August and is scheduled to offer the same instruments in Europe this week. CME first launched LNG swaps that referenced ICIS Heren's indexes in East Asia, Iberia, the Mediterranean and Northwest Europe back in April, however. CME has so far cleared one transaction on the Heren index, between RWE and another counterparty, believed to be Vitol Group. The deal was for a small amount and was considered to be a test run of the service. "RWE has executed several further LNG derivative transactions since this first trade and we expect rapid growth in LNG derivative trading as it becomes an integral tool to be used in the evolving global trade in LNG," a spokesperson at RWE told IFR. Major LNG shippers and banks approached inter-dealer brokers such as Tradition and Tullett Prebon over the last year with the desire to create a liquid OTC market for the purpose of hedging in a once dormant sector now primed for a breakout. Over the past twelve months Tullett Prebon alone has brokered at least 40 OTC swaps totaling more than 10trn Btu, or three cargoes, across a handful of counterparties, Melissa Lindsay, global head of LNG at the firm in London, told IFR. Lindsay added the potential size of the market with the entry of more players is "extremely promising." The process of building liquidity has been encouraging so far, but high demand on legal resources to set up have been delaying approvals, according to Lindsay. Before entry of the exchanges, market participants have needed to set up OTC swaps Master Agreements, facilitated by the International Swaps and Derivatives Association, with as many active counterparties as to feel confident to get in and out of trades. That issue is slowing down the liquidity build-up, but the presence of exchanges could mitigate that problem by simplifying entry into the market. "The amount of demand in the market is greater than the current trading volume indicates, since many companies are still working on their approval, ISDA agreements, and IT systems," said Lindsay. "Those that are active so far are from a spectrum of players rather than just one type suggesting the swap has appeal to a broad audience, including oil majors, banks, European and Japanese trading houses and utilities." Demand is largely coming from shippers operating in the burgeoning spot cargo market, looking to more efficiently hedge their price exposures. "If a paper market evolves around, then smaller traders can access the market without getting bullied by some of the bigger players," said Nick Potter, LNG analyst at consultancy Poten & Partners. "This will really benefit the traders the most, because they'll be able to access the LNG market that they normally couldn't have." NASCENT PHYSICAL MARKET After experiencing a drop-off in demand in the late 2000's after the US discovered an abundance of shale gas and no longer needed to import LNG at high prices, the market has since been revitalized. The 2011 earthquake in Japan forced the country to shut down its nuclear reactors and increase its dependence on LNG. Japan, already the world's largest importer, is not the only one to change course over the past few years. China has begun to reduce its reliance on coal with the intention of using LNG as a replacement as well. At the same time, former exporters such as Malaysia and Indonesia have become net importers. Bernstein Research predicts LNG demand will double over the next decade, a prospect all the more startling considering that shippers have been redirecting their tankers mid-route as countries step in to make better offers for an increasingly scarce product. Link this Share this Digg this Email Reprints

You are receiving this email because you subscribed to this feed at blogtrottr.com. If you no longer wish to receive these emails, you can unsubscribe from this feed, or manage all your subscriptions