European LNG 'in the money' versus oil-linked contract prices: Commodity Insights

Northwest European LNG prices have trended below cheap oil-index contracts, according to data from S&P Global Commodity Insights, with traders adding that healthy inventories in the European LNG market have provided a buffer for supply and prices.

Platts, a part of Commodity Insights, assessed the Northwest European LNG marker for August at $10.486/MMBtu on July 1, prices have fallen around 3% on the week and nearly 8% since the beginning of last month.

At the same time, Platts Dated Brent was assessed at $88.01/b, up $1.18/b on the day and $11.24/b on the month, amid healthy North Sea physical buying interest across recent weeks.

Historically, LNG contracts across the globe have been priced against crude oil. Depending on the market conditions, traders have explained that: when the market is tight, typically the lower and upper bounds of contract prices are 11%-20% against Dated Brent; when the market is balanced it will be 12%-13% and when the market is bearish, generally prices won't fall below 10% otherwise buyers will prefer to buy spot LNG.

Given current market dynamics, traders see oil-indexed contracts between 12% to 13.5% of Platts Dated Brent.

At the current Dated Brent price, this would put oil-indexed volumes for 12% Dated Brent at $10.562/MMBtu and volumes priced at 13.5% at $11.883/MMBtu.

For these two contract prices, Northwest European LNG has predominantly been "in the money," since June 6 versus a 13.5% slope.

While versus the cheaper 12% slope, NWE LNG flipped to a discount versus this pricing formula on July 1.

"Oil is quite expensive now so you might start to see a turndown in Algerian piped gas to Italy and Spain over the next couple of months with more LNG exported to these markets in turn," David Lewis, LNG analyst at Commodity Insights, said.

Dated Brent has made strong gains through June, as demand returns to the North Sea crude markets, and ICE Brent futures rally.

Crude traders have attributed the support for physical differentials to improving refinery runs and strong product cracks, meanwhile in the futures market, analysts have pointed to an increasing geopolitical risk premium in response to the ongoing Israel-Hamas war.

"Oil's recent surge is broadly stemming from increased tensions between Hamas and Israel and diminishing hopes of a ceasefire, as all efforts to mediate a resolve are in vain," said Phillip Nova Senior Market Analyst Priyanka Sachdeva.

Lewis added that these higher priced oil-linked LNG volumes may be reduced in favor of spot cargo purchases.

Spot over contract

Weaker European LNG prices could be an impetus to the spot activity as participants with flexible term volumes might postpone their cargo intake to winter months and try to benefit from the cheaper spot prices.

"Algerian gas to Spain and Italy is really the main flexibility when it comes to oil vs gas pricing in Europe," Lewis said.

In June this year, Italy has taken a net of 1.67 billion cu m gas from Algeria, down 21% on the year and 16% on the month, according to data from Commodity Insights. Similarly, Spain has received 727 million cu m from Algeria in June this year, down 8% on the month, but up 60% on the year.

The extent of uptick is questionable as the gas inventories in Europe continue to trend at healthy levels.

"I don't think anyone wants to deal with LNG at the moment," said a Mediterranean-based trader. "West Europe I think is more demand driven, if they need [LNG] they will secure it."

Lewis added that "in Asia we might start to see reduction in contractual volumes and replacements on the spot market."

In Q1 2024, JKM prices – the Platts benchmark for delivering cargoes into Northeast Asia – was trading below long-term oil-linked contract prices, the International Gas Union said in their latest 2024 LNG report.

"The rebalancing was aided mostly by consumption changes in OECD Asia and Europe, with LNG supplies only marginally increasing versus the previous year," the IGU's report said. "Overall, LNG markets settled into greater equilibrium by 2024, with volatility reduced, market participation up, greater risk management opportunities and higher levels of spot trade churn."

For now, prices in Asia have seen healthy demand signals driven by expectations of heatwaves this month. Platts assessed the JKM – the benchmark price for delivering cargoes into Northeast Asia – at $12.66/MMBtu, or around a 78 cents/MMBtu premium versus the 13.5% slope of Platts Dated Brent.