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FFAs tipped to play integral role in volatile LNG market

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LNG Industry,

Forward Freight Agreements will play a key role in an increasingly volatile LNG market, reports shipbrokers Simpson Spence Young (SSY).

Intercontinental Exchange (ICE) – an operator of global exchanges and clearing houses, has launched LNG freight futures contracts based on Spark Commodities’ price assessments. These will supplement the existing Baltic routes used to settle LNG FFAs cleared and listed by CME.

The new contracts, the Spark30S Atlantic and Spark25S Pacific LNG Freight Future contracts, will be traded and settled in US$/d.

The first trading day is scheduled to be Monday 22 March, with the forward curve going up to and including December 2023.

Phillip Tripodakis, a shipbroker with the SSY gas team, believes these new offerings could be a game changer.

“With an increasingly liquid LNG FFA market, both owners and charterers will be able to effectively manage and optimise their freight price exposure and capture best value from seasonal changes in the market,” Tripodakis said.

“Spark-linked time charters in conjunction with LNG FFAs will enable owners to hedge against shoulder month market lulls while maintaining exposure to lucrative seasonal upswings.

“In turn, charterers can make focused hedges against winter freight rate peaks while ensuring they pay the bottom of the market in the shoulder months.”

“From 2023 onwards, the LNG market should rebalance,” Tripodakis added. “We expect to see healthier rates across seasons as demand growth for LNG continues unabated and a record amount of new LNG production comes on stream. Existing vessel capacity will be short to cover this additional demand for shipping.

"It's an exciting sector experiencing major changes and FFAs will be crucial going forward."

Market participants can use the LNG FFA contracts to manage price risk in respect of round-trip voyages between the US Gulf Coast and North West Europe (Spark30 assessment); and Australia and Japan, Korea, Taiwan and China (Spark25 assessment), in addition to the existing Baltic routes.

SSY’s Head of Energy Derivatives James Whistler said: “We are delighted to see ICE joining the LNG FFA market with an offering based on the popular Spark indices, ICE will bring new traders on board as they have such a strong existing network of LNG traders who will want to cover their freight exposure. Anyone wanting to execute in these new markets should contact SSY Futures in either London or Singapore, as we have the necessary skills and contact base to intermediate their trades and give them up for ICE or CME clearing.”

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