Two complementary forces are driving the global energy markets at present – U.S. supply and Asian demand.
The U.S. story is well known. Ever since the shale revolution and the repeal of U.S. crude oil export restrictions in December 2015, the U.S. has become the marginal supplier of crude oil and liquefied natural gas (LNG) to the world. The U.S. even recently dethroned Saudi Arabia as the largest oil producer, after reversing decades of declining oil and gas production.
The continued strong rise in Asian demand for energy has attracted fewer headlines but is equally dramatic. Strong demand from local consumers and industrial users means that the Asia-Pacific region now accounts for over 40 percent of all primary energy consumption on the planet. There seems no immediate end in sight: Chinese crude oil demand rose by an amazing 1.6mn b/d in January.
And as their demand for energy rises, Asian traders, refiners and power utilities are also exerting more and more of an influence on the world’s major energy benchmarks.
Over the past year, trading activity during the Asian working day – defined as 8 a.m. to 8 p.m. Singapore time – has surged in the key energy futures benchmarks of WTI Crude Oil, Henry Hub Natural Gas, RBOB Gasoline, and New York Harbor ULS
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 percent in February 2018.
This doubling of Asian-hours volume is still more impressive in the context of the growth seen in WTI over the same period. The average daily volume of WTI was 31 percent 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 February 2018, WTI has become the most liquid energy futures product traded in Asian hours.
Surging natural gas
The same phenomenon can be seen in Henry Hub natural gas futures. U.S. LNG exports linked to the price of Henry Hub have turned Henry Hub from a regional to a global marker and have encouraged Asian end-users to manage the price risk of LNG imports using Henry Hub futures.
Around 7 percent of total Henry Hub volumes, equivalent to almost 45,000 lots, are now traded during the Asian day compared with an average of 2 percent 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.
Rising Asian participation
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 outperform during Asian hours, even amid strong overall growth in CME Group’s energy derivatives volumes.