More LNG Spot Trading Expected

CME Group said on Thursday it will begin development and clearing of a Japanese LNG contract later this year, as the world's biggest importer of the fuel seeks to break a decade-long reliance on oil-linked pricing.

The contract aims to give importers, including power utilities and city-gas suppliers, an opportunity to hedge risks as Japan prepares to liberalize its power market next year, and could kickstart spot trading of the world's fastest growing energy source.

The move could also deal a blow to Singapore's ambitions to become a hub for LNG trading in the region. Already Asia's main oil trading hub, Singapore is building LNG storage facilities, while the SGX Singapore stock exchange plans to launch LNG futures, but has given no timeframe.

Japan, which buys about a third of global LNG shipments, is trying to cut fuel costs and gain more control over prices after the shutdown of the country's nuclear plants in the wake of the 2011 Fukushima disaster pushed demand for gas to record levels.

With a wave of new supply from Australia and the United States due to hit global markets in coming years, buyers have voiced concern that an oil-linked price doesn't reflect LNG market fundamentals.

The contract was initially launched last year, but has failed to gain traction, as the fuel is usually bought on long-term contracts with restricted shipping terms, while the spot market is illiquid and lacks transparency.

The relaunch with the backing of CME Group is aimed at kickstarting interest in the contract by making it easier for global players to take part, boosting liquidity.

LNG supply contracts have traditionally spanned decades and are based on the price of oil.

CME Group, the world's largest futures exchange operator, said it will work with Japan's RIM Intelligence, a provider of energy price and information services, on the non-deliverable forward LNG contract.

It will be available for submission to clearing by CME via the Japan OTC Exchange (JOE) and through over-the-counter brokers by the end of the year, CME Group said.