LNG Trading Strategy Flashcards
Name 7 Trading Strategies in LNG
1/ Tramline Trades 2/ Locational Arbitrage 3/ Diversions 4/ Re-Load/Re-Export 5/ Backhaul Cargo 6/ Cargo Swap 7/ Cash and Carry
Describe Tramline Trades
1/ Loading of the ship at the liquefaction facility
2/ Delivery of the full cargo to the designated regasification terminal
3/ Ballast (return) voyage, typically with no cargo (except heel for cooling).
4/ Repeat of steps 1-3 between same two facilities.
What is the other name for Tramline Trades
“point-to-point” trades
What is the rationale for Tramline Trades
1/ traditional, long-term supply agreements (i.e., SPAs)
2/ ensuring reliable supply
3/ Matches voyage frequency to supply agreement specs
4/ high asset utilization rates
Describe Locational Arbitrage
1/ Spot/term purchase of LNG cargo in one market (FOB or DES, if reload possible) and spot/term sale in another (DES) are (nearly) simultaneously transacted.
2/ Take delivery of purchased cargo and load (or re-load) onto LNG carrier.
3/ Transport and deliver cargo to customer for spot/term sale.
What is the rationale for Locational Arbitrage
If inter-market spread (between market where cargo is purchased and where it is sold) exceeds total freight costs (plus possible reload fees), an arbitrage profit can be earned.
In which cases can arbitrage profits be supported
cost advantages or operational tactics: backhaul cargo, bunkers cost, charter costs
Which type of market term structure (backwardated or contango) and which part of the year might be most supportive of locational arbitrage?
Contango
The higher the spread between forward prices in the future delivery window and the price at the time of cargo acquisition, the greater the expected P&L.
Describe Diversions
1/ LNG buyer enters agreement which specifies a particular destination
for the LNG cargo (e.g., destination clause).
2/ The cargo is re-directed and delivered to a different location than the one initially designated.
3/ Contract can include provisions that determine how incremental margin resulting from the arbitrage is shared between the parties.
What is the rationale for Diversions
achieve a higher trading margin than that available from destination that was initially designated
What are limitations to Diversions
whether the cargo is purchased FOB or DES, the ability to divert may be limited by seller’s ability and willingness to re-direct
Which delivery arrangement (FOB or DES) usually provides the buyer with greater operational flexibility to redirect (divert) cargos?
FOB
Describe Re-Load/Re-Export
1/ LNG cargo is delivered and off-loaded to a regasification terminal.
2/ The delivered LNG cargo may be held in storage for some period of time, without being regasified.
3/ The cargo is then loaded onto the same or a different LNG carrier, and exported to another destination.
What is the rationale for Re-Load/Re-Export
1/ Destination clause or diversion limitations may not allow direct
delivery to location offering better economic results
2/ May also be necessary for portfolio or operational optimization purposes.
Describe Backhaul Cargo
1/ Instead of returning empty on its return trip, the LNG carrier is loaded with a new cargo at the delivery location, or at a point along its return route.
2/ The new cargo is then delivered at another point (regasification facility) along the return route.
What is the rationale for Backhaul Cargo
Depending on the exact locations and extra time involved in loading and unloading the backhaul cargo, the net freight costs for both transactions can be significantly reduced.
Which recent developments might support future opportunities for backhauls, and what are some of the markets from which backhaul cargos might be available?
Spot
Europe
Describe Cargo Swap
Buyers and sellers exchange (or “swap”) contractual obligations to take or make a delivery of cargos with one another.
What is the rationale for Cargo Swap
These swaps are generally driven by relative freight cost advantages, but can also involve tax savings and even LNG quality management risk and cost reductions.
Can Cargo Swap be temporally based?
Cargo swaps can also be temporally based, in which case they are sometimes referred to as “time swaps.”
Describe Cash and Carry
1) Execute spot/term purchase of LNG cargo, and make forward sale for later date (beyond timeframe needed for transport). 2) Take delivery of cargo and place into storage (can be aboard vessel – i.e., “floating storage”). 3) Cargo is shipped to delivery location (if different than storage location), and title is transferred to buyer.
What is the rationale for Cash and Carry
If the time spread (between forward delivery month and spot) exceeds
total costs of storage, an arbitrage profit can be earned.
Can Cash and Carry be combined with another strategy?
Can be combined with locational arbitrage or other strategies, adding a locational spread dimension to trade.
Specify which trading and optimization strategies are supported by Backwardated market
Cargo Swap
If there is a substantial enough voyage time savings, seller’s obligation can be met by acquiring cargo closer to delivery date at a cheaper forward price in a backwardated market.
Specify which trading and optimization strategies are supported by Contango market
1/ Cash and Carry
2/ Location Arbitrage
3/ Diversions
4/ Reloads/Re-exports
The higher the spread between
forward prices in the future delivery window and the price at the time of cargo acquisition, the greater the expected P&L.
What are the 2 agreements attached to Spot and Short term LNG transactions
1/ Master LNG Sale & Purchase Agreement
2/ Confirmation Notice
What is a Master LNG Sale & Purchase Agreement?
not deal specific, but rather lays out the terms and conditions (i.e., governing framework) under which both parties agree to conduct spot and short-term transactions with one another.
What is a Confirmation Notice?
a binding contract once it is signed, this document provides deal-specific details, including price, quantity, LNG ship, delivery window, loading and offloading locations, and other transaction-specific requirements.
What is the agreement attached to long-term and structured deals
the sale & purchase agreement (SPA) fully defines both parties’ rights and obligations within the single agreement document.
