Asia's Growing Role in Energy Benchmarks

The share of Asian activity in the world’s major energy commodity benchmarks continues to grow as the region cements its position as the key demand hub for global energy trade.

Over the past year, trading activity during the Asian working day – defined here as 8am to 8pm Singapore time – has surged in the key energy futures benchmarks of WTI Crude Oil, Henry Hub Natural Gas, RBOB Gasoline, and New York Harbor ULSD.

The jump in energy futures trading in Asian hours is largely a consequence of the greater connectivity between soaring U.S. energy production and growing Asian demand.  U.S. supplies of crude oil to Asia have grown strongly since the repeal of U.S. crude oil export restrictions in December 2015[1].  U.S. natural gas exports are also growing strongly, either as pipeline exports to Mexico or as LNG to the rest of the world, including the Asia-Pacific region[2].

The increased activity levels in the core contracts also reflect the growing use of risk management tools by Asian energy traders and users, which are increasingly active players in the global derivatives markets.

WTI leads the way

This trend has been most pronounced in WTI Crude Oil futures.  For several years before the December 2015 repeal of the export ban, Asian hours participation in WTI represented a very steady 7% of total business.  Since repeal, that share has been growing steadily and had doubled to 14% in January 2018.

This doubling of Asian-hours volume is still more impressive in the context of the major growth seen in WTI Crude Oil futures over the same period.  The average daily volume of WTI was 31% higher in 2017 than in 2015 and yet Asian-hours participation significantly outpaced this tremendous rate of growth.

With WTI averaging 195,000 lots per day during the Singapore day during January 2018, WTI has become the most liquid energy futures product traded in Asian hours.

Refined products follow

The increased regional interest in WTI has also fed through into the key refined products benchmarks: RBOB Gasoline and New York Harbor ULSD futures.  Both benchmark products have experienced increased participation in Asian hours, although not to the same level as WTI.

Around 5% of total RBOB volumes and 4% of total New York Harbor USLD volumes are now traded during Asian hours, compared with around 3% for both a few years ago.

Again, the growth in Asian interest is outpacing the rest of the world, with Asia increasing its share even amid major growth in the total volumes of both refined products contracts.  Around 10,500 lots of RBOB and 8,500 of USLD were traded on an average daily volume basis in Asian hours in January 2018, making Singapore-day liquidity in the U.S. benchmarks comparable with the daily volumes seen for some of the Singapore-based risk management products.

Henry Hub: the next breakout

The U.S. shale revolution has had an equally dramatic impact on the natural gas market as on the crude oil market.  Production levels have increased dramatically and for the first time ever this production has a significant new outlet to the global market in the form of LNG exports.

These new natural gas exports are often destined for Asia, as evidenced, for example, by the announcement in early February that PetroChina will buy LNG from the U.S. under a 25-year deal from Cheniere’s upcoming Corpus Christi export terminal in Texas.

That deal, like the majority of U.S. exports, was linked to the price of Henry Hub, which has encouraged Asian end-users to manage the price risk of LNG imports using Henry Hub futures.

Henry Hub traditionally had the lowest rate of Asian-hours participation of all the ‘big four’ energy futures contracts, but this has changed dramatically over the past 18 months.  Recently, Henry Hub futures have set new records for both Asian-hours share of activity and for total Asian-hours volumes.

Around 7% of total Henry Hub volumes, equivalent to almost 45,000 lots, are now traded during the Asian day compared with an average 2% just a few years ago.  This trend towards greater Asian-hours liquidity seems likely to continue, given the strong pipeline of new U.S. LNG export projects that are set to come online in the period to 2020 and the increased role played by natural gas in the Asian electricity supply mix.

Conclusion

Asian participation in the major global energy benchmarks has never been higher.  This trend is driven by a greater regional appetite for risk management and by the strong and growing energy connections between the U.S. and Asia-Pacific markets.  Liquidity in the key benchmarks continues to grow during Asian hours, even amid strong overall growth in CME Group’s crude oil, refined products and natural gas derivatives volumes.

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