APAC LNG physical, financial trading activity at highest levels since 2021

Physical and financial trading activity in Asia Pacific LNG cargo markets have reached highs not seen since 2021, before the Russia-Ukraine conflict, as lower price levels, reduced volatility and slimmer exchange margin requirements whet industry appetite for spot trading, according to industry participants.

The past three months have seen an increase in spot trades done on a bilateral basis and via tenders, traders said.

The greater depth of trading has been a boon for both suppliers and consumers heading into the winter season, giving better ability to market participants to respond quickly by trading and hedging against fast-moving conditions.

Following Russia's invasion of Ukraine in February 2022, trade liquidity fell sharply and trading chains shortened from more than 10 legs in 2021 to about 2-3 in 2022, sources said.

In 2023, trading chains have been reaching as many as 15 legs in some bilateral trades.

"We recently heard cargo chains becoming longer to about 9-17 legs," a Japanese trader said, adding that continuing market uncertainty has contributed to extended chains.

One Chinese major said the standardized nature of DES JKTC spot cargoes reflecting JKM terms meant re-trading of such cargoes has become more efficient.

"The reason for longer cargo chains may be due to traders trying to optimize these cargoes and sell higher at a later time," a Japanese importer said.

Several Chinese importers were also said to be diverting cargoes from long-term contracts to Europe due to weak downstream demand in Asia.

"We are well-supplied and do not need any cargoes from the spot market, so it makes sense to divert term cargoes and save on shipping costs," a Chinese second-tier importer said.

Record high APAC LNG MOC activity

Trading activity in the Asia LNG physical and derivatives market in the Platts Market on Close assessment process reached a record high in the third quarter, according to S&P Global Commodity Insights data.

The Platts MOC process saw 11 trades from July to September. In comparison, five trades were reported in the physical MOC in Q3 2022.

Around 780,000 mt of LNG physical cargoes were traded in Q3, the highest since Q4 2021, when 1.62 million mt were traded, according to S&P Global data.

Bids or offers for physical cargoes linked to Balance of Month-Next Day JKM on the MOC made up 47 orders (38%) out of a total of 138.

On the APAC LNG derivatives MOC, a total of 335 trades of 250,000 MMBtu each were reported by 12 companies. The Balance of Month-Next Day JKM derivatives contracts made up 24%, or 79 trades, in Q3.

Liquidity has returned to the futures market as well.

JKM LNG futures traded volumes cleared on financial exchanges in Q3 reached 164,748 lots, up from Q2's 152,187 lots and 136,701 lots in Q1, according to exchange and broker data.

Incentive for hedging

The wide inter-month contango for October to December across August and September pricing periods also incentivized market participants to float cargoes to take advantage of potentially higher prices in later months.

Additionally, lower margin rates for JKM derivative contracts on financial exchanges supported trading volumes and made it easier for companies to hedge a physical cargo.

The initial margin requirement for the JKM November 2023 contract on ICE, the financial exchange with the largest JKM derivatives trading volume is currently $28.139.2 per lot, equivalent to a 20.7% margin rate as of Oct. 5, with JKM November 2023 assessed at $13.603/MMBtu at the London close.

While uncertainty around potential strike action at Australian LNG export facilities owned by Chevron and Woodside surfaced and added to concerns around price volatility and uncertainty in the near term price direction, prices further down the curve were relatively stable as market players had sufficient supply.

Unplanned maintenance and extended outages at several of Norway's key gas fields kept European gas prices elevated as well.

"TTF was volatile due to Australian strikes, Norway gas field outage and nuclear maintenance in France," a Singapore-based broker said.

Tenders and bilateral trades

Ahead of the winter season, market participants in Northeast Asia tend to procure cargoes in advance to prepare for the peak heating demand season.

Incremental demand was also seen from several Japanese and South Korean importers who had issued buy tenders seeking cargoes for October to December delivery.

Higher temperatures in parts of Asia have resulted in inventories being drawn down at a faster rate, market sources said.

Japan's Kansai Electric bought two October cargoes through buy tenders issued in September, according to sources.

South Korean state-owned importer Kogas was said to have bought several winter-delivery cargoes in the bilateral market.

GS Energy bought a cargo for Dec. 3 DES South Korea through a buy tender seeking up two December delivery cargoes, at a premium of 5-10 cents/MMBtu to JKM.

There was also buying interest from other private South Korean importers such as Posco and SK Prism for spot cargoes.

Import demand from Thailand also strengthened amid a heatwave across the country in the peak summer season. PTT issued at least five tenders seeking cargoes from September to December delivery across July to September, and purchased about nine spot cargoes through the tenders, sources said.

Meanwhile, EGAT also bought at least five cargoes at discounts to JKM, through a buy tender seeking six cargoes for end-September to December delivery.

China's Unipec also awarded a strip tender buying more than 25 cargoes across October 2023 to December 2024. The tender was awarded on a JKM-linked basis, with the exception of October 2023 cargoes on a fixed-price basis.

Industry participants said the company planned to use the October to December delivery cargoes domestically while the cargoes purchased for 2024 would be for trading purposes.

Taiwan's CPC returned to the spot market for August to December delivery cargoes in the summer months. The company awarded its latest buy tender seeking two cargoes for Dec. 10-12 and Dec. 18-20 delivery at a 10-30 cents/MMBtu premium to JKM, sources said.