First - Glencore muscles in on energy majors' LNG turf
Trading house pushes into market dominated by energy majorsBy Oleg Vukmanovic and Henning Gloystein
LONDON, June 6 (Reuters) - Commodities trading giant Glencore Xstrata's entry into high-margin liquefied natural gas (LNG) trading could mark a turning point for a market long constrained by the grip of major oil companies on long-term supplies.
Glencore has lured a four-person team of LNG traders in London and Singapore from Morgan Stanley, which is reducing its commodity trading.
Dealers said the move could trigger a second wave of new entrants keen to exploit price differences between U.S., European and Asian gas markets.
LNG is among the fastest growing commodity markets as increasing volumes of super-cooled gas are shipped from the Qatar, Nigeria, Indonesia and other countries.
Most LNG trade operates on static long-term agreements controlled by the major oil companies and a few producer countries.
But trading houses such as Glencore and arch rival Vitol are betting that the advent of U.S. LNG exports from 2015 spurred by a boom in shale gas will create space for new entrants.
"What has stifled trading is that nobody could get anything much to trade," the former head of LNG at a major European energy company said.
"The introduction of U.S. volumes linked to (benchmark U.S. gas price) Henry Hub changes everything. The upside is huge and the entry cost is just some salaries," he said. "It's time for the trading houses to give it a push again."
"LNG will continue to be the fastest growing sector of the international energy business for many years," Vitol says on its corporate website.
The trading houses also hope to exploit spot trading opportunities to Asia at a time when European gas trading desks are struggling from low prices and demand in economically depressed Europe.
The U.S. shale gas boom and near record low prices at $4 per million British thermal units (mmBtu) has led companies to build LNG export terminals, boosting the supply of cheap uncommitted volumes, which traders can sell to Asia for as much as $20/mmBtu.
That spread, or arbitrage, as well new supplies from the U.S. and Australia later this decade, should boost spot trading liquidity, and potentially iron out price differences between geographic regions.
Cargoes of LNG can change hands for as much as $50 million each and cash is gushing in to industry leaders such as Shell , Total and BG Group. Their overall trading profits are increasingly supported by LNG trade.
Commodities trading houses such as Glencore, Vitol and Gunvor have made efforts to challenge that dominance.
"Glencore is the type of company that others will follow ...so hopefully it is a sign of people coming back into the market," an executive with a top LNG shipping company said.
Morgan Stanley's LNG trading desk was seen as a big strength of its commodities trading division.
Yet many banks are downsizing their commodities desks because of toughening regulations on proprietary trading, where the banks trade on their own behalf instead of for clients seeking to hedge energy price risk.
Three of Morgan Stanley's LNG traders are based in London and one is based in Singapore, three sources with knowledge of the move said. Information on the timing of the moves was not immediately available.
Morgan Stanley and Glencore declined to comment.
"The LNG guys were the star performers of the European power and gas desk and management tried hard to keep them on board," one trader said. "It will be difficult to replace these guys."
The traders joining Glencore are Maggie Jia, Rajiv Panicker, Lou Montilla and Luis Lesmes, other dealers said.
While trading activity on the spot LNG market is rising, barriers remain as the sector is still dominated by long-term deals between buyers, such as European and Asian utilities, and sellers such as Qatar, the world's top LNG exporter.
New players need access to specially-designed LNG tankers, to the LNG source and in some instances to terminals.
For a financial player, Morgan Stanley has been particularly active trading LNG, especially in sales to Argentina and Spain. Vitol won a Argentina contract last year.
Second - Morgan Stanley LNG traders leave for Glencor
(Reuters) - Morgan Stanley's four-person team of liquefied natural gas traders in London and Singapore are leaving the bank to join commodities giant Glencore Xstrata, industry sources said on Thursday.
Three of the traders are based in London and one is based in Singapore, three sources with knowledge of the move said.
Morgan Stanley and Glencore declined to comment.
It is rare for banks to have active LNG trading desks and Morgan Stanley's team was seen as a big strength of its commodities trading division.
Morgan Stanley has been particularly active trading LNG into Argentina and Spain in recent years.
Morgan Stanley CEO James Gorman hinted in October at a possible sale of the bank's multibillion-dollar oil trading arm that handles energy and some metals trading.
He said Morgan Stanley had an obligation to explore "different structures" for those units because of new U.S. regulations limiting their activities.
Glencore, one of the world's biggest commodity traders, is trading gas and has been looking to expand its LNG business.
Third - Free Market LNG: the Next “Endless Bid?”
By. Keith Schaefer
Editor, Oil and Gas Investments Bulletin
Liquefied Natural Gas (LNG) prices have long been linked to the price of oil—with gas priced at roughly 13% or 1/8th the price of Brent, with the details determined in confidential contract negotiations.
Asian consumers are tired of this linkage, especially since it has meant prices that are four times higher in Asia than in North America.
In fact Japan spent US$75.4 billion on LNG last year, paying an average price of US$16.60 per million BTU—while gas prices in the United States averaged just US$2.75.
No Japanese politician, economist, or grocer thinks that makes sense. So Asia is trying to lower prices for Liquefied Natural Gas (LNG) as fast as they can.
It’s a fact that de-linking LNG prices from oil to Henry Hub makes a BIG difference for Asian buyers. For example Cheniere agreed to sell 1.6 to 1.8 mtpa to Korean Gas for US$3 per MMBTU plus a 15% premium to Henry Hub prices.
Here's some context to that: On April 30, 13% of Brent would equal $13.47/mcf. On the same day the Cheniere deal would have Korean Gas paying ~$7.51/mcf. That’s a big difference! Cheniere has signed similar Henry Hub-indexed deals with three other buyers.
But Asia doesn’t just want lower prices in individual deals. No, Asian buyers want the market to determine how much LNG is worth –they are convinced the market will push LNG prices down fast with waves of new supply on the horizon.
They may or may not be right on this one.
Futures contracts are the way markets determine how much a commodity is worth. For LNG such a system would also improve the credibility of pricing information and act as a valuable hedging tool.
Japan is pushing for a futures market for LNG—and the potential Canadian supply could be the first to get priced this way.
It’s not just talk. In March Japan’s Ministry of Economy, Trade, and Industry (METI) announced plans to launch the first LNG futures contract at the Tokyo Commodity Exchange in two stages starting in 2014.
Related article: Will Washington Allow US Companies to Export Natural Gas?
The first step would be a cash-settled contract, with settlements based on the spot price on the last session of the month. These cash-settled futures could be sold up to one year forward and would be based in US dollars and metric tonnes.
When I heard this, I called Dan Dicker in New York, former floor trader and author of Oil’s Endless Bid—the best book I ever read about the financialization of commodity prices and what it means for retail consumers (it means higher prices and more money out of our pockets).
My overall question was—would a futures market lower prices? Or would the financialization of LNG do what it did for oil: create endless bids and higher prices? The short answer on both was no.
“Creating a futures market won’t help create a cheaper pricing mechanism,” he told me. “Yes, it’s going to be less related to Brent and more to nat gas—but more to local/Asian nat gas, where prices are high—not North American natural gas. If I was trading physical, that’s how I would expect the new market to react.”
Dicker is the kind of trader who would play in a LNG futures market – and he thinks Asian prices would stay high.
The problem is that a commodity market needs a full complement of players. Producers, wanting high prices, are already long in an emerging futures market. To counter, LNG buyers are naturally on the short side. Then traders enter the scene, playing the difference and speculating on the actual supply-demand situation.
Dicker says it took years for this financialization of natural gas to take hold in the US and it was the investment banks who added enough outside players to make that happen.
To find out what Dan Dicker is investing in now – start a 30 day free trial to Oil & Energy Insider – click here to find out more.
Japan may want free market LNG, but to financialize LNG it will need a bigger playing field.
Japan's utilities are huge buyers of LNG. But what Japan doesn’t have is a natural market of sellers – they don’t have a large homogeneous group of providers, like the United States has with its oil producers.
So the question is: Could financialization of LNG give rise to an endless bid cycle?
Related article: Recent Events in the Battle to Export US LNG
Might Japan be putting the cart before the horse?
Not only are the players lacking, but Japan’s proposal has some gaping holes. For one, the futures LNG market it imagines would be for true physical delivery— buyers would actually want to take possession of LNG.
In the US, the futures almost never become physical – which is the case with most futures markets. So they – Henry Hub and Japan’s LNG proposal – are very different markets. And there’s little in the way of a blueprint for Japan’s version.
That doesn’t mean we don’t need a better pricing mechanism for LNG. The growing spot market desperately wants one.
The spot LNG market is growing, and fast. Spot trades grew from 10% of global LNG trade in 2003 to 25% in 2011, and volumes continue to climb.
There’s a good reason the spot market is hopping – buyers and sellers want more options. A natural disaster here, a hurricane there – LNG needs can change quickly and so supply flexibility is an increasingly important concept in the LNG world.
For a spot market to hop, however, requires a recognized and reputable spot price…such as a futures market.
It’s a chicken-or-egg scenario, for sure.
While Japan’s futures market could start next year, it will still take years for global LNG prices to break free from oil indexes and secretive long-term contracts. The next wave of LNG supply to come online will be in Australia, in 2015—and they have sold their gas in long-term contracts at oil-indexed prices.
But the system will change, eventually, because LNG is outgrowing its pricing and trade systems. Such is the cost of success.
It will be very interesting to see how it all pans out – and how LNG proposals in Canada react.
The Posts can be found at:
http://www.reuters.com/article/2013/06/06/morgan-lng-idUSL5N0EI10A20130606
http://www.reuters.com/article/2013/06/06/morgan-lng-idUSL5N0EI0QD20130606
http://www.businessinsider.com/free-market-lng-the-next-endless-bid-2013-6
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