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Affinity arranges first LNG freight derivatives trade

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LNG Industry,

Affinity (Shipping) LLP has announced that it has facilitated the first LNG freight swap settled against the Baltic Exchange LNG spot assessments.

According to the statement, the trades involving Total Gas & Power and Glencore were arranged over-the-counter by Affinity Financial Products LLP and executed bilaterally by the counterparties.

Benjamin Gibson, Head of LNG Derivatives at Affinity, said: “With liquidity increasing in the LNG market in recent years, freight has come under the spotlight as participants look to manage their exposure to vessel spot rates.

“Using the Baltic Exchange's rate assessments we are able to help clients benchmark their freight exposure and develop a forward market for hedging price risk.”

Affinity claims that, last winter, tight vessel availability pushed charter rates from an average US$50 000/d during the first half of the year to above US$200 000/d during November 2018. By March this year, the Baltic BLNG1 assessment had decreased to nearly US$20 000/d. As LNG traders seek to build trade volumes, their exposure to this volatility in freight rates increases.

According to the statement, the Baltic Exchange’s LNG rate assessment methodology utilises submissions from independent shipbrokers to mark time charter equivalent rates for LNG carriers on certain, key trade lanes. Affinity claims that this benchmark not only includes the headline rates for hiring the vessels, but also the highly important ballast bonus and/or position fees paid by charterers depending on market conditions.

Baltic Exchange Chief Executive, Mark Jackson, said: “The Baltic has over 30 years of experience of benchmarking freight markets and our LNG assessments are the latest in our suite of shipping market data. We’re delighted that this product has been adopted by the market which has recognised the value and quality of our index production process. We look forward to continue working with brokers and users in this developing market and anticipate that the next two Baltic LNG routes (USG/East Coast UK and USG/Far East) will go live later in the year.”

This first trade signifies a key milestone in the development of an LNG forward freight market. With the Baltic Exchange set to release even more LNG spot route assessments, Affinity claims that it sees more appetite for bilateral trades.

Gibson added: “Initial trades are all about testing the settlement mechanism. Now is the time to try things and see how they work. We have lots of interest in the Baltic's forthcoming Atlantic routes and a weighted average of routes to give a global LNG freight benchmark.

“The strong growth in financial trading of JKM and the spreads to other natural gas hubs will underpin the physical demand for hedging freight rates as understanding of the products and market develops.”

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