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Watch: LNG: JKM swap trades reach fresh record

Trade in JKM™ swaps has continued its strong levels of growth in 2017. Recent figures from the Intercontinental Exchange show that it only took five months this year to surpass the volume of swaps in the whole of 2016. In this video, S&P Global Platts pricing analyst Max Gostelow examine swaps volumes against JKM™ prices and shares his insights on the changes in trading behavior as the derivatives market becomes more active.

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Video Transcript

Welcome to the Snapshot, our series that examines the forces shaping and driving global commodity markets today.

In this episode, we’ll look at the record levels of growth in the JKM swaps LNG derivatives market this year.

Participation in the JKM swaps market has also grown significantly over the past few years, with the market now comprising between 20 and 30 counter-parties.

Trade in JKM swaps has continued its strong levels of growth in 2017, after more quadrupling in 2016. The volumes we are talking about today are only those cleared through ICE. They exclude volumes traded bilaterally or cleared on other exchanges.

Recent ICE data already shows that it only took five months this year to surpass the whole of 2016 period.

Up until the end of July, 20,900 lots have been cleared through ICE, with a record 4,891 lots cleared in July. That’s over 4 million mt of LNG, or around 70 cargoes that have transacted in the first 7 months of 2017.

Most of the record volumes over the last few months have occurred at a time when JKM levels have been largely rangebound between $5/MMBtu and $6/MMBtu.

As we start to enter the winter delivery period, interest in swaps have unsurprisingly picked up even more. This is affirmative nod for a market looking for increased commoditization. Traders and end-users show increasing interest to manage their risks by hedging some of their long-term physical JKM exposure through the derivative.

Over the first 11 days of August, a further 2,980 lots have cleared. This puts August on pace to eclipse July volumes and potentially become another record setting month.

Perhaps more encouraging for the swaps market development is the breakdown of the swaps volumes.

In the past, sources anticipated that as the swaps market grew in liquidity and became an active market, then the monthly swaps and the early quarters volumes will become more active. And that’s been a reality, with the bulk of liquidity in 2016, and so far in 2017, being traded on a monthly or quarterly basis.

At the same time, we are also seeing more interest in traders taking specific monthly positions for the winter period.

In July, we saw less traditional clips being offered such as a November and December tranche as opposed to the whole fourth quarter. This is hailed as a sign that liquidity had grown enough for people to start tailoring for their specific positions.

As we go further down the curve, to half-years, seasonal swaps, and full year calendar swaps, some market players are expecting that the JKM will closely track TTF or NBP, in addition to being influenced by pure LNG supply and demand fundamentals in Asia.

Traders are also taking proprietary positions on the winter NBP-JKM spread, specially after this spread dramatically rose to over $3.50/MMBtu in January.

So, until next time on the Snapshot, we’ll keep an eye on the markets.