Settled futures and swaps contracts for liquefied natural gas will allow hedging up to a year ahead
In a chilly market for frozen gas transported by ship, Singapore is working to entrench itself as the region’s primary trading hub for the energy source.
The city state’s main market operator, Singapore Exchange Ltd., is set to launch cash-settled futures and swaps contracts for liquefied natural gas as early as January, it said this week. The new contracts, which have received regulatory approval, will allow LNG traders to hedge the price up to a year ahead, the exchange told The Wall Street Journal.
They will be the first contracts based on Singapore’s new benchmark price for LNG, known—after the city’s famous cocktail—as the Singapore SLInG. If the benchmark and market catch on they could bring transparency to the opaque world of LNG trading in Asia, where demand for this easily transportable form of gas is expected to grow quickest in the coming years.
Most LNG—gas frozen to liquid form so it can be shipped to destinations where it is “regasifed”—has been bought and sold in Asia on long-term contracts at prices linked to crude-oil benchmarks like Europe’s Brent or the U.S.’s West Texas Intermediate. There is also a substantial “spot” market for buyers looking to purchase gas at shorter notice.
Asian traders of LNG are already shifting from oil-linked pricing to a more complex “hybrid” system that also links to U.S. gas-hub prices, data from research firm Wood Mackenzie shows. But they have also long called for a regional benchmark against which both spot and long-term contracts can be priced, to create a fairer market for both buyers and sellers.
“It’s been an Asia-wide movement which says, Why should Asia, which consumes 80% of the world’s LNG, be pricing its gas molecules off a little field in the North Sea?” saidMichael Syn, head of derivatives at Singapore Exchange. He said the exchange is responding to demand for a regional benchmark price.
Some in the market, though, prefer to negotiate deals directly with customers. Royal Dutch Shell PLC said that while it often trades on indexes and benchmarks, it doesn’t want to sacrifice the customer intimacy that comes from trading directly.
One or more gas-pricing hubs in Asia could emerge “over time,” said Roger Bounds,Shell’s vice president for global LNG.
“Provided that a new Asian hub is liquid, transparent and robust, we would also expect to trade with our Asian customers around one or more such hubs,” he said. Shell declined to say whether it contributes data to the SLInG benchmark.
The push for an Asian LNG benchmark comes as supply surges in the region, notably in Australia where producers such as Chevron Corp. and Shell have major projects under way or revving up. Global LNG export capacity is expected to increase by more than 40% by 2020, according to the International Energy Agency, mostly thanks to growth in Australia and the U.S.
While LNG supply gains have outstripped demand growth recently, sending reported prices in Asia lower this year, many analysts expect countries like China and India to import more in coming years as they seek out fuels cleaner than coal.
Singapore’s pitch to become Asia’s LNG trading hub is based on its prominence as an energy-trading center. Its location makes the generation of a benchmark price possible as LNG moves through pipes and on ships in and around the city-state. The SLInG price is based on weekly data submitted by to the market by 20 suppliers, buyers and traders. None has yet placed a trade marked to the index.
Singapore has already moved ahead of other Asian cities such as Tokyo and Shanghai—located in two big LNG-consuming nations—in promoting itself as a trading hub, saysJonathan Stern, chairman and senior research fellow at the Oxford Institute for Energy Studies.
But he said China’s likely future role as a major LNG consumer could eventually make it a better place for an Asia-wide benchmark.
“You cannot physically develop enough trade in Singapore to get a deep and liquid market that will be representative of the whole of Asia,” he said. “Maybe Southeast Asia, yes, [but] to say that Singapore could become a reference price for the Chinese market: no.”
Singapore Exchange’s Mr. Syn said the company will go with whatever the industry wants as an optimal pricing point, whether a virtual one based around Singapore or a physical hub in a place like Shanghai.
“Both models work as long as the market comes together,” he said. “You need physical infrastructure and some luck.”