Discounts to gas hub for delivered LNG cargoes to Europe help spur arbitrage talk

Wide discounts to the Dutch TTF gas hub for delivered LNG cargoes in Europe, increased shipping activity in the Pacific and recent trading activity have spurred market talk about when the arbitrage to Asia could open.

With the war in Ukraine helping keep end-user prices around $30/MMBtu -- about 4-1/2 times the level at the same time a year ago -- inter-basin spreads still favor Europe, as do netbacks to the US Gulf Coast for FOB shipments.

There have been recent signs the dynamics could be changing, due in part to limited slot availability in Europe. Traders generally agreed that much will depend on demand and how long new coronavirus lockdowns in China last.

"If you are going to get cargoes at TTF minus $3 or $4 in Europe, your option in Asia is probably there. I heard some recent transactions at TTF minus $1.50 to $1.70," an Atlantic-based trader said.

"The difference there between $1.50 to $2.50, that is the range where the arb would be open for some people, depending on how they do their shipping. Cargoes, I think, will be pulling away from Europe a bit."

The arbitrage between the regions can be measured in different ways. Market participants tend to look at JKM-TTF derivatives, with the spread traded April 14 during European hours at minus $4.75/MMBtu for June, which includes the delivery period for US FOB LNG cargoes to Asia.

There is also the spread between physical assessments to consider. JKM for May was assessed at a 9.4 cents/MMBtu premium to what DES Northwest Europe was assessed at April 13, days before the front-month was to flip to June. When reflecting where JKM June was trading at April 14 during European hours, JKM would still be at a discount to Northwest Europe.

Notable for arbitrage, congestion at the Panama Canal has eased in recent weeks. The maximum wait for unreserved LNG tankers transiting the shortest passageway from the US Gulf Coast to East Asia stood at three days northbound and three days southbound on April 14, according to the Panama Canal Authority.

That has come even as the market has recently seen fresh demand for ships within the Pacific.

According to S&P Global Commodity Insights data, the LNG freight route cost on April 14 for a TFDE ship loading from the US Gulf Coast and discharging in the Northwest Europe stood at $1.46/MMBtu. To the Japan/South Korea region, the LNG freight route cost stood at $3.07/MMBtu.

Asian nations can secure cargoes from different suppliers like Russia, Qatar, and Australia. LNG volumes originating from Qatar and shipped either in Europe or in Asian nations have become of particular interest following the March 22 gas agreement between Germany and Qatar.

The LNG freight route cost for a TFDE ship loading in the Middle East with delivery in Northwest Europe currently stands at $2.15/MMBtu. If the same ship was about to load from the Middle East and call in a port in the Japan/South Korea area it would cost $1.79/MMBtu.

Market trends

In Asia, several market participants said trends appeared to be moving in the right direction for the arbitrage, though with so many variables at play they were not sure when a flip might occur.

"The arb is closed for now, but I do not think it will remain closed," a portfolio player said, while a producer said: "There could be some US cargoes arriving in summer with the arb likely to open again."

Another producer said that while the arbitrage generally was still closed, it appeared to be closer to opening than in previous weeks as European discounts to TTF have widened to around $4/MMBtu.

China's zero-COVID policy seemingly continuing For the foreseeable future meant lockdowns, which cause supply needs to fluctuate. The timing of when those restrictions ease could affect the timing of when the arbitrage opens.

"COVID-19 situation in Shanghai is still pretty bad, getting stricter in Guangzhou as well, and it is affecting downstream demand," a Chinese importer said.