FAQ: Japan Crude Cocktail

What is Japan Crude Cocktail?

Japan Crude Cocktail (JCC), also known Japan Custom Cleared, represents the average price of crude oil imported to Japan and reported by the Japanese Custom. JCC is mainly used by LNG traders in APAC and EMEA, despite representing crude oil prices.

At the inception of the LNG industry, there was no natural gas benchmark or crude oil futures, which left room for JCC to become the index. Traditional LNG projects needed committed buyers under long term contracts, before proceeding to a final investment decision.

Today, JCC is the most common way to price LNG contracts in Japan and other first generation buyers in  Korea and Taiwan. By extension, most of the historical term contracts out of Malaysia, Australia and Indonesia were based on JCC.

What are the contract specs of JCC futures on NYMEX?

The contract is for JCC Detailed in USD/bbl. The floating price is based directly on the data published by the Japan Custom and Ministry of Finance (primary source).

JCC contracts are sized at 1,000 bbl with a minimum block size of five contracts.

The cash-settled contract offers monthly offerings listed for the current year and the next two calendar years.

What are the benefits of JCC futures on NYMEX?

JCC futures on NYMEX allow you to:

  • Trade more efficiently and comply with hedge accounting rules
  • Avoid JPY exposure and facilitate trading activity with USD-denominated contracts
  • Enhance price transparency and market discovery by trading on CME ClearPort or CME Globex
  • Transition part of your OTC trading activity to cleared futures
  • Trade in tandem with major Natural Gas and LNG references like Henry Hub, NBP, TTF and JKM

How is Japan Crude Cocktail futures contract traded?

Most of the JCC market is currently traded bilaterally, leaving room for JCC futures to act as a market-maker for producers and utilities willing to hedge their price exposure.

Market makers typically hedge JCC positions by trading a basket of Crude Oil futures, based on proprietary proxy models.

Producers and utilities have a perfect hedging instruments through OTC swaps/options. Market-makers keep a risk in their book, equivalent to the difference between their model and the official JCC price, till the instrument settles, leading to possible settlement risk.

Trades may occur after the end of the pricing month, up to the publication of the official data.

How is Japan Crude Cocktail calculated?

The calculation for JCC is derived from data published by Japan Ministry of Finance and Custom.

Specifically, JCC is the average price of a basket of customs-cleared crude oils under the following nine HS Codes: 2709.00 100, 2709.00 900, 2710.19 162, 2710.19 164, 2710.19 166, 2710.19 169, 2710.19 172, 2710.19 174, 2710.19.179, reported in the Japan customs statistics in terms of value and quantity.

The JCC price in JPY/kiloliter is the ratio of the total value to the total volume of the nine applicable HS codes.

A first set of provisional data is published around the end of each month for the preceding month, followed by a set of revised data, also called detailed data, one month later.

Lastly, a set of final data, referred to as fixed data, is released in mid-February for the months of the preceding calendar year. This means there is no detailed data for the month of December.

In addition, JCC in USD/barrel for both provisional and detailed data are also used in LNG contracts. By convention, the conversion rate used for JPY to USD is based on data from Japan Ministry of Finance and Custom.

Is the Japan Crude Cocktail futures contract new to the derivatives market?

Yes and no. JCC futures are the first exchange-traded contracts, but banks and international trading houses have been trading OTC swaps and options for JCC for more than 10 years.

How does oil indexation for LNG work?

LNG is often priced on oil, multiplied by a coefficient to reflect the oil/gas parity.

The oil parity is the LNG price that would be equal to that of crude oil on a barrel equivalent basis. A coefficient of 0.1724 results in full oil parity. Most current contracts are in a range of 11-15% to oil prices.

To avoid sharp increases or drops of price resulting from this oil indexation, many Asian LNG contract prices are based off the average of JCC for the preceding three to nine months, sometimes with a one-month lag.

Mechanisms like Cap/Floor Prices and S-curves are common. A S-curve means the coefficient used in the formula will change to a lower percentage if oil prices are above/below a certain level.

What are the other LNG pricing mechanisms?

Alternatives to oil indexations include fixed prices or to link the price of LNG to a Natural Gas or LNG price index.

In Europe and the U.S., infrastructure and regulations have led to the emergence of active trading hubs, each reflecting their local market’s dynamic.

NYMEX Henry Hub, quoted in USD/MMbtu, is the benchmark for U.S. natural gas and by far the most active Natural Gas futures contract in the world. U.S. LNG term contracts are commonly indexed on NYMEX Henry Hub.

NBP and TTF are the leading European gas hubs and are increasingly used for LNG pricing in Europe.

In the absence of efficient gas trading hubs in Asia, the LNG community has started recently to adopt Platts JKM for spot transactions.