Glencore Muscles In On Energy Majors' LNG Turf

Commodities trading giant Glencore Xstrata's entry into high-margin liquefied natural gas (LNG) trading could mark a turning point for a market long constrained by the grip of major oil companies on long-term supplies.

Glencore has lured a four-person team of LNG traders in London and Singapore from Morgan Stanley, which is reducing its commodity trading.

Dealers said the move could trigger a second wave of new entrants keen to exploit price differences between U.S., European and Asian gas markets.

LNG is among the fastest growing commodity markets as increasing volumes of super-cooled gas are shipped from the Qatar, Nigeria, Indonesia and other countries.

Most LNG trade operates on static long-term agreements controlled by the major oil companies and a few producer countries.

But trading houses such as Glencore and arch rival Vitol are betting that the advent of U.S. LNG exports from 2015 spurred by a boom in shale gas will create space for new entrants.

"What has stifled trading is that nobody could get anything much to trade," the former head of LNG at a major European energy company said.

"The introduction of U.S. volumes linked to (benchmark U.S. gas price) Henry Hub changes everything. The upside is huge and the entry cost is just some salaries," he said. "It's time for the trading houses to give it a push again."

"LNG will continue to be the fastest growing sector of the international energy business for many years," Vitol says on its corporate website.

The trading houses also hope to exploit spot trading opportunities to Asia at a time when European gas trading desks are struggling from low prices and demand in economically depressed Europe.

The U.S. shale gas boom and near record low prices at $4 per million British thermal units (mmBtu) has led companies to build LNG export terminals, boosting the supply of cheap uncommitted volumes, which traders can sell to Asia for as much as $20/mmBtu.

That spread, or arbitrage, as well new supplies from the U.S. and Australia later this decade, should boost spot trading liquidity, and potentially iron out price differences between geographic regions.

Cargoes of LNG can change hands for as much as $50 million each and cash is gushing in to industry leaders such as Shell , Total and BG Group. Their overall trading profits are increasingly supported by LNG trade.

Commodities trading houses such as Glencore, Vitol and Gunvor have made efforts to challenge that dominance.

"Glencore is the type of company that others will follow ...so hopefully it is a sign of people coming back into the market," an executive with a top LNG shipping company said.

Morgan Stanley's LNG trading desk was seen as a big strength of its commodities trading division.

Yet many banks are downsizing their commodities desks because of toughening regulations on proprietary trading, where the banks trade on their own behalf instead of for clients seeking to hedge energy price risk.

Three of Morgan Stanley's LNG traders are based in London and one is based in Singapore, three sources with knowledge of the move said. Information on the timing of the moves was not immediately available.

Morgan Stanley and Glencore declined to comment.

"The LNG guys were the star performers of the European power and gas desk and management tried hard to keep them on board," one trader said. "It will be difficult to replace these guys."

The traders joining Glencore are Maggie Jia, Rajiv Panicker, Lou Montilla and Luis Lesmes, other dealers said.

While trading activity on the spot LNG market is rising, barriers remain as the sector is still dominated by long-term deals between buyers, such as European and Asian utilities, and sellers such as Qatar, the world's top LNG exporter.

New players need access to specially-designed LNG tankers, to the LNG source and in some instances to terminals.

For a financial player, Morgan Stanley has been particularly active trading LNG, especially in sales to Argentina and Spain. Vitol won a Argentina contract last year.

(c) Reuters, 2013.