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. China became the world’s largest energy importer in late 2018, surpassing the position long held by the U.S1. U.S. supplies of crude oil to Asia have grown strongly since the repeal of U.S. crude oil export restrictions in December 20152. 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 region3.
The increased activity levels in the core futures and options 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.
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 the repeal, that share has been growing steadily and has more than doubled to 17% in August 2019 (see chart 1 below). According to the latest statistics from the U.S. Energy Information Administration (EIA), crude exports to Asia-Pacific averaged around 1.3 million barrels per day in the second quarter of 2019, up from just over 900,000 b/d in 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 11% higher in 2018 than in 2016 and yet Asian-hours participation significantly outpaced this tremendous rate of growth.
With WTI averaging 218,000 lots per day during the Singapore day during August 2019, up 40% from the same month a year ago. WTI has become the most liquid energy futures product traded in Asian hours.
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 7% of total RBOB volumes and 6.5% 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 9,700 lots of RBOB and 11,500 of USLD were traded on an average daily volume basis in Asian hours in August 2019, making Singapore-day liquidity in the U.S. benchmarks comparable with the daily volumes seen for some of the Singapore-based risk management products.
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. Natural gas volumes look set to rise further in the years ahead. At the Houston Gastech conference in September 2019 natural gas conference, S&P Global Platts analytics4 said that the new wave of Permian oil production in the U.S is leading to much higher volumes of natural gas (as a byproduct) with much of this additional gas expected to end up in Asia.
In February 2018, PetroChina announced that it 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.
According to the International Energy Agency (IEA), by 2024, the United States will surpass Australia and Qatar as the world's largest exporter of LNG. To capture this growing demand for LNG5, CME group announced the launch of a physical delivery futures contract for US Gulf Coast LNG5. Additionally, the IEA anticipates U.S. LNG exports to exceed 100 billion cubic meters (bcm) in the next five years. Global LNG demand is predicted to grow 4% annually, after reaching a record 432 bcm in 2018, driven by growth in the Asia Pacific region.
Around 5% of total Henry Hub volumes, equivalent to almost 25,000 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.
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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