Q&A: LNG trader

I joined a BB after uni and ended up at their commodities division. My desk was dabbling in LNG so I ended up focusing on it. After a few years, I left to join my current shop - which was for the best I guess as my old BB has now exited commodities so I would have ended up leaving anyway!

Can't comment on hedge funds as I haven't worked in one. Commodities trading at a bank is nowadays focused on paper, not physical (with a few exceptions). It is also much more intense in terms of commitee approvals, risk assessment, etc. This type of scrutiny is also applicable in trading houses (the 'cowboy' image is slightly out-of-date / exaggerated) but on different dimensions factors.

My old boss, who was a big name in the commodities industry, used to say that if you like poker you should trade financial and if you like chess you should trade physical! He was being somewhat facetious but you get the sentiment.

Comp level is the same as other energy products, so it is very dependent on group/trader/year in question. I enjoy the lifestyle. It's hard work and there have been times I have been up all night (pretending to sleep but then checking my phone every hour) on trades I have placed in Asia, but as you become more senior you learn to manage that. I don't bite that our industry is exceptionally stressful. All high-pressured jobs (finance, law, consulting, etc.) are stressful and it is up to the individul to handle it so that it doesn't kill him/her.

nattyphizz:

With US LNG - are you more involved in trading HH now ?

HH, JMK, TTF. With futures open interest at insane levels, hedging has shot up. Argubably the latter two are in prime spot to be the world's benchmark on the commodity.

nattyphizz:

What are your thoughts on the interconnectedness of global gas markets now. I think the events this summer has gotten everyone thinking about this.

Interesting question. LNG has been / is being liberalised as an industry, meaning it's no longer regionally priced but issubject to global pricing (which is why, IMO, oil indexation is diminishing in favour of gas-on-gas pricing). That being said, the key interplay will still be Europe / Asia, as I think there is still less correlation between the US and the other two (Europe being the swing purchaser / importer). How that interplay pans out will largely determine global LNG price formation. As a general remark, I would say that the perception of LNG as a clean and non-costly fuel will globalise the market even more. What I mean is that even though I am based in Europe, I absolutely need to know how supply & demand is shaping in Asia, my US buyer needs to be cognisant of my own demands, and so on. 15 years ago, that wasn't the case.

nattyphizz:

Any thoughts on Asian demand? storage?

Ha, the 1 bln question. Storage capacity is important, at least for the next 2-3 months, not least because supplies are locked in (even if gas demand falls sharply). As for demand in general, I expect it will increase as lockdown relaxes (at least in China - Japan, I suspect, will be worse) although prices, particularly spot, will be dead cheap - for reference, have a look at the spot prices between China and India. It was something like $2/mmbtu. That's at least 70% lower than what it was 2-3 years ago.

One word on Asia spot demand: resilience! As also touched on above, LNG demand has held tight during lockdown (all things considering) compared to oil, albeit at a hefty $ discount. China is a different story to Japan, not least because data is of questionable accuracy. I believe that China will continue supporting incremental LNG growth, I just don't know how fast they will go back to doing so.

I don't think it's crazy at all to build up a physical book from scratch. On supermajors, have a look at data to see the huge increase in LNG recently (and not just talking about Total and Shell (who have traditionally been the big boys). Then, on the commodities houses? Glencore's purchase of Orsted's LNG business, Mercuria's poach of the EDF trading team, Vitol's investment in LNG terminals (admittedly on regas not prop basis)...the list goes on. If the LNG industry was already saturated by 2020, I'd be very disappointed!

Majors are the best place to start, however when recruiting you gotta cast a wide net (and I mean very wide - throw apps to marketing arms of producers and snaller trade shops or funds). Bank vs major is just not comparable...different businesses frankly- one is mainly phys the other is fin although both will be involved in both phys and fin to various extents. Majors are great because you’re handheld throughout the learning process in the program (in some cases to the point where I’ve heard theres too much handholding, has upsides and downsides) and the opportunities are massive given they ARE the energy business to an extent and by definition. Great thing about BB is you actually get paid well at the junior level (major comp is still good but nowhere near BB), and you learn to learn (entreprenarial) which is hard but has its upsides and you also learn to trade without the infra behind you (extremely valuable if going for a buyside gig). I know many other young guys in the biz (i am a jr) who started at the top trade houses (glen, traf, vitol) and got the hell out within 1-2 years with little to show in terms of exp ...it’s not the best place to learn but its not terrible at all, think it might be heavily team dependent...

If I had to pick I would do major TDP, trade house program and last BB

I would agree with the above poster. The graduate programmes at Majors are by far the best option, especially the BP one (although Shell is the undisputed king of supermajors for LNG). They offer you the best training because they are actually designed to make you a trader.

Different story with commodities houses where the majority of traders are laterals (myself included). Even the ones who offer graduate schemes are not that dedicated to home-grow traders. Rather, they are designed to attract good talent with the view to possibly find a good place for them within the organisation later one, if they prove their worth.

If you are dead-set on physical trading then BB S&T is probably not the optimum starting point (unless you don't have more relevant options of course - generally speaking starting your working life at a top institution such as a BB has plenty of advantages!). It's a completely different story from when I started with a BB before/on the credit crunch. Commodities desks have now either diminished completely or been reduced to financial trading.

Simplistically, netback is the LNG revenue minus opex. Opex meaning, at its most basic, costs for converting the gas into LNG + transportation costs. Where it gets more complicated is when you add more to the subtraction, e.g. hedging costs (from any swaps/options/futures/etc.), royalties etc.

Platts now publishes global LNG weekly netback forecasts but companies will still use different ways for measuring netbacks so it's a bit risky to do a $-for-$ comparison unless you know the values are comparable. I recommend you check the annual reports / SEC filings of some of the producers, as netback calculation is always set out by management.

Does this answer your question?

Between the two, ops lends itself a bit more naturally to FO transition. That being said, trade finance experience can be excellent and you can get a useful skillset. I would look at shops with a banking legacy in their DNA (Mercuria, Castleton, Freepoint, etc.) as their investment strategy can involve financing structures more integrally.

LNG shipping is very poor atm. The longer trades were on hold and there was just not enough of short/spot cargo shipments to bring the freight $ up. Medium/long-term it should get better as large scale projects resume / go back on track.

Re brokers, Tullett Prebon and Poten & Partners.

Although a strong technical skill-set on fundamentals is essential, it is still very much a relationship business. Modelling will only get you so far, not least because, as I think you are alluding, market data is unreliable. The main reason for that is because industry growth will largely be defined by China in the near/medium future, and data coming out of China is limited and unverified.

Preferred vantage point is diversification. Putting aside the Majors, for players such as mine and the other commodities houses, the mostprofitable ones have easily been the ones with the most diverse portfolio of LNG trading assets. Take Gunvor for instance who are now the largest independent trader. Their short-term/spot desk is very active (taking into advantage of the arbitrage opportunities), their prop asset-managing investments are killing it and they are also concluding some large-scale/long-term trades. They have every base covered.

So in response also to your second question, yes I think the ultimate portfolio player is still the endgame and all commodities trading houses have strategically been moving to that direction. But it needs more $$ than oil for sure...

Exxon is big enough to have an impact on the US LNG scene given that there is no one clear dominant force in the region. I don't think Total's and Shell's status in Europe will be affected though, they are too far ahead.

No comment on the BB!

short/medium term is shite and will remain so. A bit longer-term, I think prices will be resilient enough, not least because the majority of deals are still locked into long-term contracts.

As to whether it impacts on my decision-making, it does, and I am quite bullish on long-term prospects.

George_Banker:

Can you walk through the LNG trade cycle and nomination timing and process? For example if you are trading cargos for October delivery, what are the dates that matter and what pricing indicators are you looking for - how far in advance is something hedged and what are the timing risks for physical delivery?

It depends on your output (spot vs short vs long). Spot/short term pricing forecasting is more of a guestimate. A six month price difference can be as high as 10%+.

George_Banker:

What happens when you put something back onto a longer term agreement...for example if you put something back to Cheniere marketing (I assume you deal with them)?

Longer-term agreements are different, as you are dealing with more macro factors such as the strength of the counterparty, tightness of your contract, pricing is a bit more elaborate, what credit support I am getting, etc. I am not just relying on futures forecast because then I would never get paid!

George_Banker:

Also, do you hate when people say "livin the dream"?

Well I am British so during shit days we will just talk about the weather and how crap it is.

Very much so, particularly for long-term contracts. Not really re Asia.

pactumx:

On hedging where it more exotic for me, what is the instrument (swap/option/future) most typically used?

All of them, e.g. if it's a pure hedge to a physical trade then futures are quite common.

pactumx:

Could you name or specify the counterparties in the LNG hedge market? Is the banks, majors? Who is considered a clear leader?

Majors will have prop trading desks, as will commodities traders, but that's not the priority. The priority is very much physical. Banks more so I guess and some of the hedge funds. I am in physical so I don't trade financial on a prop basis.

Totally doable. At least in Europe, major utility houses such as RWE and EDF have graduate programmes hiring applicants out of uni or (often) with some interim experience required). Even if your current employer doesn't have such a scheme, I would have thought that you would be eligible to apply to one that does - prior experience as a junior a trading analyst is quite common and relevant.

HF trading is primarily financial, rather than physical so a different path altogether. BB trading to HF trading seems like a natural progression but I am not an expert on this - not the same beast as physical trading in a commodities house.

I wouldn't do anything different in terms of my own career start. My first exposure at my old BB wasn't in commodities, it was in prop trading (remember this was pre 2008) - think FX, equities, etc. and I really disliked it which is why a few months in I jumped ship to the commodities division after a position opened up. It was all a rite of passage and good learning ground at the time (plus the opportunity to trade at a young age).

That being said, things are VERY different now and BBs aren't the obvious choice for someone who's committed to a commodities career. As mentioned in one of my earlier answers, the supermajor graduate trading schemes are top notch (BP especially) so it sounds you are on the right track. Try and convert your internship to a full-time offer after uni, complete tha graduate programme and hopefully that will lead to a trading position. You're absolutely laying good foundations.

Very volatile. This month has been abysmal but it's looking better again (may even reach $2 per MMBtu!).

There is this company called 6-1 commodities with hedge fund backing. They recently poached the whole Gazprom team. Google them. They are running speculative trades, which to me is just pure punting.

I can't see it for three reasons:

• cost

• availability (all very well having a swanky new vehicle using renewable energy but what happens with 90% of the transpotation modes out there - look at the maritime industry for instance: hydrogen is only feasible for some types of ships like ferries, containerships, etc.)

• technology (we are just not there yet with hydrogen, both in terms of efficiency and in terms of H&S).

To be clear, I am not discarding its importance and it will definitely have a role to play both within the renewable energy sector and actually in terms of the reneweable energy sector itself. Even if they can't be symbiotic, I do think that the two industries will at least co-exist for the next generation.

A few points:

• you're in China, which is (together with India) the biggest growth market for LNG in the years to come, so milk it.

• it sounds like you're at ENN and you guys have some really exciting projects coming up. LNG trading is a longer-term game than other commodities (not least because of the scales) which means that there'll be times of prep work and strategy. Make full use of it.

• If your plan is to move to a commodities house, then make sure (i) you continue building on your technical skillset (learning on each index, doing the long-term negotiations) and (i) you network like crazy to have a foundation for having relationships in the region. You can then leverage of those to jump ship (albeit it'll have to be in Singapore).

Thanks EnergyHOU. I'm not in ENN, we are bigger than them as they are privately owned but we are state owned. With that, also comes limited mandate and risk averse capacity. I will definitely stay for the time being trying to learn as much as possible. Also agree on your comment on MSPA, even though it's incredibly boring and dry. Haha.

But just out of curiosity. What do the analysts do at trading house on a day-to-day basis? I interact with some of them(similar age), they seem to be given a very small role of just editing CNs and reconciling positions. I actually feel that I'm in a better spot than some of them(even though I get paid a ton less haha).

EnergyHOU:

Good traders and originators are good because they know how to negotiate deals both on the paper and in person.

To the OP: I fully agree with this post from EnergyHOU. But I just wanted to highlight the quoted bit above in particular as it completely hits the nail on the head.

Sort of. Yo can do an inventory transfer (i.e. load LNG from tranks of another shipper) or, more commonly (and what the above is referring to), you reload previously unloaded LNG cargo out of Europe (which some terminals here can/claim they can do) and you export it to Asia, which is a higher-priced market.

Operationally, it's inefficient but, as a buyer, I sometimes do it because 1) I don't have to share diversion upside with my supplier (which is standard for divertible supply contracts - the majority of the supply into European terminals is divertible, with a few exceptions such as Spain) and 2) I don't get charged a premium when I buy from a producer, who will invariably want wants to control LNG flow.

The availability / commercial viability of a reload comes and goes depending on how the market is going, on availability of shipping, on what parallel supplies (=US) are incoming, etc.

The specs are an issue due to the boil-off of methane and nitrogen if you're putting into a network, not if you're using for a fuel source (because the cargo's bulk temp is warmer than usual for loading out of an export terminal). But regardless, it is easy to resolve because most import terminals for networks have a Wobbe correction facility, meaning they balance the calorific richness by mixing in nitrogen and the only cost is the fuel used to run the nitrogen producer, which is very easy to price. The chartering guys may end up having an argy bargy with the shipowners about boil-off rate, etc., but this is rarely an issue under the LNG sale & purchase.

You can trade paper at a major or a commodities house, though this will by and large be for hedging purposes. In those circumstances, your physical experience will be helpful for sure, and you can even try and make the move internally. Your current shop may afford you that opportunity but you can also look at trading houses which have a bit of a financial DNA in them (such as Mercuria, Castleton, Freepoint and others that are spin-offs from BBs).

If your goal is to trade paper on a pure marketing making basis, then I would assume you're better off going to a hedge fund or a prop trading firm, and in those circumstances your current experience will be less relevant.

Finally, if you decide to stick with physical long term, then I would say keep an open mind about the type of shop, as you never know which place will give you the opportunity to trade your own PnL. Trading at Vitol or Trafi doesn't in and of itself mean you will make more money or have a better career advancement than being at a utility or a major.

I didn't like my first desk (as mentioned above, think prop trading fixed income/equities). I just felt like I was staring at a screen all day manipulating money with no real impact. The commodities opening felt more "real world" to me so I thought I should give it a shot. I am not saying I was right or wrong, it was just a matter of taste (most things in life are, including top end career choices) and financial engineering isn't for me.

As for the future, who knows. I am happy where I am and I really enjoy my industry so I would like to stay in it long-term (and keep rising through the ranks at my current shop). I am of sufficient seniority at my desk that I can regulate my travelling (pre-COVID) and my hours better which is important for me as I have a young family so if I were to leave for something else it would have to be on the same/better terms.

As Cicero said, men of different tastes have different pursuits...:)