Sanctions the next big driver as LNG market digests decision to pause Nord Stream 2

The LNG market's reaction to Germany's pause of the Nord Stream 2 gas pipeline due to Russia's incursion into Ukraine was tempered Feb. 22, as traders awaited sanctions and shifts in trade flows that could have a bigger impact on prices.

Activity was quieter than market participants expected, with traders chalking that up to the fact that uncertainty over the pipeline's future had been brewing for months.

Next up: How hard will expected Western sanctions hit gas and LNG supplies, which suppliers will step up to fill the void, and what happens with demand heading into the summer?

"Most LNG suppliers happily just selling spot," an Atlantic-based trader said.

Dutch TTF April futures opened during European hours at Eur79.30/MWh, trading in a range of Eur75.30/MWh to Eur81.40/MWh before closing at Eur78.660/MWh at 4:30 pm London time. Platts assessed the TTF April contract at $26.147/MMBtu Feb. 22, up $2.602/MMBtu. S&P Global Platts assessed DES Northwest Europe for April $2.297/MMBtu higher at $25.183/MMBtu Feb. 22. That was the largest one-day advance since Jan. 24. Overall, however, the advance could have been much sharper because of how reliant Europe is on Russian gas supplies.

"All waiting for the sanctions," the trader said, noting also that Nord Stream 2 could be brought back down the line.

A second Atlantic-based trader said it's difficult to assess the medium-term and long-term impact from Germany's decision Feb. 22 to press pause on the Nord Stream 2 gas pipeline project with Russia as European allies and the US finalize a response and likely sanctions after the Kremlin ordered troops into a disputed area of Ukraine. That challenge, the trader said, helps explain the relatively mild market reaction to the news.

"I feel like because NS2 won't be there for summer; summer will be bullish again," the second trader said. "And, if JKM pulls LNG, which they will have to, then repeat of what we saw in December."

The delivered price for LNG into Northwest Europe rose to a record high of $58.638/MMBtu Dec. 21, amid strong demand in Europe, before falling back to current levels, which still remain sharply higher than a year ago.

Trade flows

Trade flows also were being focused on by the market, as it sought to catch its breath from the Nord Stream 2 decision.

"If sanctions were to hit LNG, would just expect Yamal volumes to go east to their best buds in China," the first trader said, referring to the Russian LNG project.

A third trader said that while there will be much talk in the days ahead about the US and EU asking more exporters to send additional volumes of LNG to Europe, it was unclear where those supplies will come from or which terminals in Europe have extra regasification space.

"A lot of people are sitting and watching, and if they want to get involved are trading the less volatile products at the back of the curve as a proxy," a fourth Atlantic-based trader said.

Freight considerations

Meanwhile, the LNG shipping market remained flat during the week or so leading up to the Nord Stream 2 decision.

The Atlantic day rate during this period showed no fluctuation and was assessed by Platts at $30,000/d with a ballast bonus of 50%, while the Pacific day rate also stayed level at $30,000/d with a ballast bonus of 75% Feb. 22.

The freight route cost for a tri-fuel diesel electric ship loading from the US Gulf Coast and discharging in Northwest Europe currently stands at $1.08/MMBtu, compared with $3.12/MMBtu Nov. 30, a decrease of 65%.

Alternative suppliers for LNG cargoes are the West Africa producers and Qatar. The freight route for a tri-fuel diesel electric ship loading from Nigeria and discharging to Northwest Europe stood Feb. 22 at $1.11/MMBtu, while the same class type ship if loaded from Qatar and discharged in Northwest Europe would have to endure a freight route cost of $1.66/MMBtu.