ICE, S&P to Launch LNG Derivative Contracts -- Update

By Timothy Puko and Sarah McFarlane 

One of the major U.S. exchanges is moving forward with plans for derivatives that could revolutionize natural-gas trading, making it a more international market like crude.

By May, global gas will have a futures contract based on liquefied exports coming out of the U.S., according to Intercontinental Exchange Inc. and S&P Global Platts. The two companies are launching the effort, an ICE traded contract, as liquefied gas supplies are soaring, raising interest from suppliers and traders eager to lock in or bet on prices.

The Wall Street Journal first reported on ICE's plans for the contract in December. CME Group Inc. was planning a similar contract. A company spokesman declined to comment on Wednesday.

ICE futures will be based on Platts' spot price assessment for liquefied natural gas coming from the Gulf Coast, where the U.S. is opening its first wave of export terminals fed by the shale-gas boom.

The U.S. has long had a heavily traded futures market based on the region's Henry Hub benchmark. But the LNG contract will incorporate costs for liquefying and shipping gas to some of the world's priciest markets, a better assessment for the gas's value, said Chris Pedersen, LNG analyst at Platts.

LNG has long been sold mainly through yearslong contracts priced off oil, gas that is piped, and price reporting agencies' data. But so much new supply is coming world-wide from the U.S. to Australia that it is likely more than long-term consumers can take, forcing them to resell it. Spot market activity has already surged and many traders are eager for derivatives to deal gas globally.

"Big time," Mr. Pedersen said on his expectations for a growing futures market. "Traders are licking their chops over it."

The hope for ICE and Platts is that this contract helps integrate several regional gas markets and becomes an international benchmark like Brent and West Texas Intermediate became for oil. But many derivatives products get created, only to be lightly if ever traded. Companies have already tried before to create LNG benchmarks with limited success, including Japan OTC Exchange and the Singapore Exchange, better known as SGX.

The market is growing with supply, likely to rise by 44% from 2015 to 2020 and outpace new demand through the end of this decade, according to Moody's Investors Service. Gas is expected to make up around one quarter of the world's primary energy mix by 2040, up from around a fifth, according to the International Energy Agency.

Write to Timothy Puko at [e-mail] and Sarah McFarlane at [e-mail]

(END) Dow Jones Newswires

March 22, 2017 13:40 ET (17:40 GMT)

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