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ICE Sees Turnaround in NatGas, Positions for Globalization
While low volatility and volumes marked the North American natural gas futures market in the first quarter, IntercontinentalExchange (ICE) has noted a strengthening in volume trends in both March and April, driven by increasing natural gas prices. Convinced of the globalization of the natural gas market, ICE is looking to establish a European marker.
“This year’s upward trend in natural gas prices from around $3.30 to more than $4.30 for longer-dated contracts demonstrates how price volatility makes hedging a necessary component of managing risks at all gas price levels,” said ICE CEO Jeffrey Sprecher during an earnings conference call Wednesday. Since natural gas “is a big part of our business,” volumes suffered in January and February when the markets were “relatively soft” compared to those very strong two months in 2012.
Overall, futures average daily volume (ADV) was 3.6 million contracts, down 4% compared to the first quarter of 2012. The Spring quarter started off in a more robust fashion. The company’s overall futures ADV in April was 3.8 million contracts, a 17.5% gain over the same month in 2012.
Natural gas for 1Q2013 totaled 1.4 million contracts, down 27% from 1Q2012. January and February natural gas contracts were off about 40% from the same months in 2012, but the tide turned in March, which registered a 9% gain over March 2012. April continued on the plus side, according to an ICE posting Thursday that showed 1.5 million contracts, a 7% gain over April 2012.
Sprecher sees natural gas as ultimately becoming a global market. He said ICE is well-positioned in the U.S. market and now has connections in Europe.
ICE completed its ICE Endex transaction in March, acquiring an 80% stake in the Amsterdam-based exchange, which incorporates the natural gas futures and spot market of the former APX-ENDEX business. “We believe that this transaction will serve as a catalyst for ICE’s further expansion into Continental European natural gas and power markets,” Sprecher said. The ICE Endex exchange is best known for its natural gas futures contract, known as the TTF gas market. But it also operates key spot markets for gas in Continental Europe and the U.K.
Sprecher said ICE hopes to grow the Dutch TTF contract into a marker for the European continent. ICE already has traded the U.K. natural gas contract and expects to see globalization of the market through liquefied natural gas, and particularly with the entry into the market of low-priced U.S. natural gas.
The market will find a way to take advantage of that low-cost gas “either by moving natural gas through liquefaction or by moving industrial processes to the U.S. to take advantage of these low prices, but thereby arbitraging by moving jobs and industry. One way or another, we think that traders will be trading the complex with those facts in mind.
“We believe there’s significant potential for global natural gas markets to become more liquid and transparent, while operating on a more connected basis.”
During the conference call, Sprecher also touched on the current regulatory landscape as ICE navigates a fifth year of regulatory reform. He said the focus on operational certainty and the impact to end-users is key but said U.S. swaps are still a stumbling block.
“Uncertainty remains for U.S. swaps on additional requirements for swap execution facilities for clearing and on other final rules,” Sprecher said. “I’ll note that this uncertainty has caused us to pause our work on the clearing for non-deliverable forward FX [foreign exchange] contracts, but we’ll continue to monitor regulatory developments to evaluate next steps as rules are finalized, hopefully later this year.”
He said further change will inevitably be driven by Europe’s work on financial reform in the coming year. Once those take shape, Sprecher said he believes the focus of regulators will then shift to ensure international cooperation and the reduction of regulatory arbitrage opportunities. “We’ve successfully launched our U.S. swaps data repository for commodity swaps and credit derivatives, and we’re building a European FDR for both futures and swaps market, which is required under EMIR [European Market Infrastructure Regulation].”
Reflecting the lower volume of trades, ICE 1Q2013 income declined 8% to $135.4 million ($1.85/share) from $147.9 million ($2.02/share) a year earlier. Excluding special items, the company earned $2.03/share in the quarter. Revenues declined 4% to $352 million on the 4% decline in ADV.
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