CME launches U.S. LNG futures contract with physical delivery

LONDON (Reuters) - Exchange operator CME Group said on Wednesday it would launch a futures contract for liquefied natural gas (LNG) that is physically delivered at U.S. Cheniere Energy’s Sabine Pass export terminal, a move likely to increase transparency in the market.

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The contract, to be launched on Oct. 14, will have 24 delivery months, meaning a market participant in October could buy an August 2020 LNG cargo and trade it up until the delivery date.

It will help buyers to manage risk, giving them exposure to the fastest growing source of LNG supply while at the same time shedding light on physical and future LNG prices in an nascent and opaque market.

A number of other contracts have been launched in the past two years related to LNG and LNG shipping as supply of LNG and the infrastructure to both export and receive it has expanded rapidly.

The CME, the Intercontinental Exchange and PEGAS have launched futures and options priced against the Japanese Korea Marker which has been published by commodity pricing agency S&P Global Platts for a decade has become a benchmark for Asian LNG prices.

Most of the world’s LNG is bought under bilateral contracts, some lasting as long as 20 years and linked to oil prices. The remaining 20% is traded on the spot market.

But LNG in the United States, which now has a 10% market share, has decoupled from the oil price and linked instead to Henry Hub natural gas in the country via supply contracts with Cheniere and some other producers.

These contracts also have flexible destination clauses which allow buyers to pick up their cargoes from the export terminals with their own ships and take them where they want, unlike conventional contracts which have a fixed delivery point.

These changes have created a disconnect in the global LNG marketplace which many traders exploit by taking advantage of geographical arbitrage and differences in oil and gas prices. Futures contracts can help mitigate those risks.

“As the world’s largest buyer of LNG, we believe diverse risk management tools bring more transparency to the marketplace and we welcome CME Group’s launch of physically delivered LNG futures,” said Kazunori Kasai, CEO of JERA Global Markets, part of the world’s largest LNG buyer, Japan’s JERA.

“We expect CME Group’s U.S. LNG Export futures contract will have a positive impact on the procurement and price discovery of LNG in Asia, as well as in the U.S,” he said in a statement issued by CME announcing the contract.

Reporting by Sabina Zawadzki. Editing by Jane Merriman