LNG indexation to TTF will extend liquidity growth

LONDON (ICIS)–Traded volumes at Europe’s most liquid gas hub the Dutch TTF could climb even further in 2020 as prospective market participants target the hub for gas indexation for LNG contracts.

With Atlantic-based LNG supply expected to soar further in 2020 the amount of European LNG offtake will continue to grow.

Global LNG supply will average just over 32 million tonnes (mt) per month in 2020, a 7% increase year on year, according to the LNG Edge supply forecast.

This will encourage a shift in LNG hedging strategies with European buyers and sellers targeting the TTF as a means of protecting against price risk .

“With a shift to Atlantic supply and demand dynamics, the amount of LNG contracts priced to the TTF and away from oil indexation will climb”, Petronas Energy Trading CEO Fasludeen Hadi said at the European Annual Gas conference (EAGC).

In the Atlantic, US export capability will approach 5mt per month by July 2020, 1.9mt more year on year.

Europe will be one of the key offtake markets for the additional supply, especially for flexible spot cargoes unless there is a strong upward correction on the Asian markets.

“The TTF will become the main focus of US projects,” Bryan Frey, global head of LNG marketing at the Freeport LNG project in Texas said.

TTF LIQUIDITY BOOM

Both brokered trade and deals on the exchange rocketed in gas year 2018 with combined liquidity up 48% compared to the previous gas year.

Growth on the US-based ICE and CME platform were all strong drivers of exchange strength, clawing market share from the over-the-counter (OTC) market.

Exchange liquidity more than doubled in gas year 2018 compared to gas year 2017, whereas OTC trade grew 30%.

Contributing to the TTF’s dominance in Europe has been the growth of LNG across the continent, combined with the migration of volumes away from the British NBP.

“LNG players using TTF indexation supports the idea of the hub eventually becoming the global benchmark for gas,” a European gas trader told ICIS.

The depth of the TTF curve also allows for hedging across a greater period whereas many Asian markets lose liquidity beyond a year out.

“With the TTF, you can lock favourable price spreads well out onto the curve, and then you can unwind your position, depending on where the gas is delivered,” Marc la Rosa of Societe Generale Corporate said at the EAGC.

This will encourage trade not only at the TTF but other surrounding markets, which generally move in line with Europe’s largest hub.

In fact, ICIS analysis showed that most of the increased trade at the hub has come from activity on forward contracts delivering after month+1, with all delivery timeframes climbing considerably in gas year 2018 when compared to the last;

– Monthly trade beyond month+1: 47% higher

– Seasonal trade: 17% higher

– Yearly trade: 11% higher

TTF GLOBAL INFLUENCE

In September, European gas and power markets surged due to numerous supply shock announcements. The Asian spot price responded immediately to remain competitive with Europe.

As a result, price movements across Europe are having more of an impact globally, both in the Atlantic and Pacific basins.

This will continue into 2020 as the TTF as a global benchmark gains further traction.

The TTF correlation to the East Asian Index (EAX) was 88% year to date, 2.5 percentage points higher year on year.