The European Methanol Market Adopts Futures Trading

  • 12 Feb 2020
  • By Gregor Spilker
  • Topics: Energy

In less than two years since launch, European Methanol T2 FOB Rdam (ICIS) futures (MT2) have gained a significant amount of traction. Since its inaugural trade in March 2018, the MT2 contract has traded each month bar one. In December 2019, market participants executed a record volume of 495 contracts, meaning that 49,500 metric tons changed hands, equivalent to 50 standard physical cargoes.

The contract has started 2020 positively, with more than 300 contracts already traded. Activity in the contract increased since the spot price for methanol, which forms the reference for the futures contracts, bottomed out in the second half of 2019. The spot price reference is provided by ICIS, a price reporting agency, in a weekly assessment.

Source: ICIS, CME Group

Forward liquidity increases

Market participants using the contract have accessed various points of the forward curve. In the contract’s first year of existence, participants mostly entered trades at the nearby end of the forward curve, with 44% of total volume executed against the spot month or the first two forward months’ contracts. In the second year of trading, activity grew overall, with the share of trading in the front quarter (Month 3 to Month 5 forward) exploding (+268%).

Higher forward liquidity is a sign of a healthy futures market, since it indicates that participants are confident that the contract price reflects their physical exposure over the long term.

Source: CME Group

Open interest grows

Open interest is another key metric to assess the health of a futures market: it shows the number of open contracts along the forward curve. Typically, a high level of open interest indicates “stickiness” and a contract’s relevance to participants with physical price exposure to the underlying commodity. Even though it varied over time, open interest in MT2 is clearly in the ascendency, with more than 800 contracts currently held open by participants.

Source: CME Group, data as of Jan 28, 2020

Shifting trading patterns

The MT2 contract may see further growth should the physical underlying market move towards more spot trading at the expense of “contract-price” mechanisms.  The wider adoption of floating-price indexed term contracts would also help the development of futures trading.

European methanol futures have found good industry support since launch. Both trading volumes and open interest point to an increased adoption by the industry. The increase in trading liquidity witnessed over the past six months further strengthens the case to include futures trading in a company’s commodity price risk management policy: a high degree of trading liquidity enables participants to adjust their positions quickly and efficiently, leading to more client interest and higher liquidity in a virtuous cycle.