CME to launch LNG freight futures as demand risks rises

London - Exchange operator CME Group said on Tuesday it would be the first futures exchange to launch trading of three liquefied natural gas (LNG) freight futures contracts on Dec. 23.

The move shows growing demand for hedging tools in the quickly developing and increasingly volatile LNG market, with the introduction of freight derivatives having lagged behind the development of financial tools to hedge gas volumes. “The biggest unhedged risk (on the LNG market) is on the freight side,” Owain Johnson, CME Group global head of product development and research, told Reuters. “We have had a lot of demand from brokers and traders and are launching the LNG freight contracts as soon as possible.” LNG Freight futures will be available to trade on the New York Mercantile Exchange (NYMEX).

So far, multi-month charters of physical vessels have been the major tool to hedge price fluctuations on the LNG shipping market. Strong volatility in shipping rates last year, when charter rates for LNG tankers doubled between August and October, increased the need for financial products to mitigate price risks. The contracts offered by CME Group are based on the assessment of three LNG shipping routes that the London-based Baltic Exchange started publishing earlier this year. The Baltic Exchange collects data from shipping brokers to provide assessment of routes from Australia’s Gladstone to Tokyo, U.S. Sabine Pass to Britain, Sabine Pass to Tokyo.

(Read more)