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January 2026 highlight
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Physical LNG Arbitrage – A core trading strategy
Physical LNG arbitrage is one of the most widely used strategies in the LNG market. It involves exploiting price differences between regional gas hubs by redirecting LNG cargoes to the most profitable destination. Traders aim to capture spreads between benchmarks such as JKM (Asia), TTF (Europe), and Henry Hub (US).
Arbitrage considerations
Identify price differentials
Traders monitor global LNG price markers. For example, if JKM in Asia trades significantly above TTF in Europe, diverting cargoes to Asia may yield higher margins.
Assess logistics and constraints
Shipping Costs & Freight Rates: Arbitrage only works if the incremental revenue exceeds transport and regasification costs. Regas Slots & Infrastructure: Availability of regasification capacity and shipping flexibility is critical.
Hedge price risk
Before physical delivery, traders often hedge exposure using futures or swaps linked to the target hub (e.g., JKM swaps for Asia, TTF futures for Europe). This locks in margins and mitigates volatility.
Optionality management
LNG contracts often include diversion clauses, reload options, and floating storage opportunities. Skilled traders leverage these to maximize arbitrage potential.
Here is an example scenario:
A trader holds a cargo initially destined for Europe (TTF at $9/MMBtu equivalent). Asia’s JKM spikes to $12/MMBtu due to unexpected cold weather. After factoring in $1/MMBtu shipping and $0.50/MMBtu regas costs, the net gain from diversion is $1.50/MMBtu. The trader hedges JKM exposure via ICE, securing profit before physical delivery.
Other key risks:
- Freight rate volatility
- Basis risk between physical and financial markets
- Regulatory and operational constraints
To learn more check out our Overview of the LNG Markets & Trading and LNG Trading & Hedging courses designed to give you hands-on experience in navigating this dynamic market via interactive exercises and immersive simulation.
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