Arbitrage to Asia could open beyond March as interbasin LNG spreads strengthen

Interbasin LNG spreads for April and May strengthened Jan. 25 in a sign that beyond the prompt, the arbitrage to Asia may begin to reopen for cargoes.

Much of the focus in the global LNG market has been on the Atlantic over the last month, with strong prices and declining freight rates incentivizing deliveries to Europe, even as slots have filled up quickly.

Amid the volatility, interbasin spreads have remained negative for March, the current front-month contract. The spread between the S&P Global Platts JKM, the benchmark for spot-traded LNG delivered to Northeast Asia, and the Dutch TTF European gas hub is often used as a sign of arbitrage potential between the Atlantic and Pacific basins. With JKM derivatives trading at a discount to TTF, the arb to Asia has been shut. Looking beyond March, the trend lines appear to be shifting.

"It's a fair comment that spreads are moving fast," said an Atlantic-based trader.

In the JKM derivatives market, the spread between the March JKM and TFU (TTF traded in $/MMBtu) came in during European trading hours, ranging from minus $5.250/MMBtu to minus $3.500/MMBtu before London close. The spread for April also strengthened, flipping into positive territory at 5 cents/MMBtu before close. The spread for May, positive early in the trading day, closed flat.

"This is something that we can expect, but demand in Far East is quite muted so far," said a second Atlantic-based trader. "I would probably bet on late April/May. We are not seeing huge incremental demand coming online and that's the reason why I said so."

Some cargoes have been diverting from the Atlantic to the Pacific recently. Beyond supply and demand fundamentals, a third Atlantic-based trader said market participants may have no other way to monetize shipping, so they are considering shipping sunk.

"But even then, it is still hard to make sense of it," another trader said.

While spreads have strengthened, some market participants believe that in the immediate term the arb is still favoring Northwest Europe.

"I heard today that traders are still paying big TTF discounts for Asian deliveries," another Atlantic-based trader said.

One thing the traders agree on is that the trend lines are shifting again, putting the arb to Asia possibly back in play.

"More possible than last week, yes," another trader said.