LNG arbitrage to Far East opens on weaker Europe demand

The arbitrage for LNG cargoes to move from the Atlantic basin into the Far East has opened as weaker gas prices in Europe widen the East-West spread.

Platts, part of S&P Global, assessed the Japan/Korea spot cargo price for August at $10.685/MMBtu July 13, with H1 August assessed at $10.635/MMBtu and H2 August at $10.817/MMBtu.

Platts DES Northwest Europe Marker for August was assessed at $8.599/MMBtu, while H2 July was assessed at $8.499/MMBtu.

One way to consider the price arbitrage between the regions is to compare staggered delivery dates, accounting for the longer voyage time to Asia, and the associated shipping costs.

For cargoes with a H2 July delivery into Europe, redirecting them to Asia for delivery in H2 August would generate an approximate profit of around 14.5 cents/MMBtu. This is when comparing delivery prices and additional freight.

Amid feasible economics on paper, sources said the arbitrage in reality was 'partly' open. The ability to redirect cargoes depends on the shipping constraints for sellers for those who have shipping. Only those that have available freight in the Pacific or flexibility with future deliveries will be able to capitalise on the opportunity.

Nonetheless, sources said a slightly eased shipping market would make this more feasible.

"Shipping is not tight as scheduled maintenance from US projects," said an Atlantic trader. "I see more interest in diverting east to utilise their shipping.''

The spread between Europe and Asia also means that marginal US cargoes should head to the Far East, where the net backs from the US Gulf Coast are stronger, further tightening European supply.

For a very prompt cargo loading from the US Gulf Coast -- when considering freight differences and a later delivery date to Asia amid longer shipping -- delivery to JKTC would command a premium of around 90 cents/MMBtu over selling into Europe.

Even a cargo loading 50 days from today would also likely gain a premium of around 85 cents/MMBtu heading to the Far East. This implies that the European market looks set to tighten further as sellers keep their sights focused on finding buyers in Asia, where prices are more competitive.

There is the expectation of some cargoes continuing to head to Europe, despite the poorer netbacks, however. This is also the result of shipping constraints for sellers who cannot optimize the additional shipping to JKTC.

Open arb causing LNG-TTF convergence

Market sources said the open arb has had some impact on prices in Europe, which will need additional support both to keep cargoes in the Atlantic basin, and to bring additional volumes from the US.

Some sources viewed tradable values at around flat to TTF for the DES NWE LNG market July 13, with offers heard between flat and a 20 cent discount. The market was assessed at a 25 cents/MMBtu discount to August TTF on the day.

The August TTF has been trending lower since June 30 as Europe shows limited concern about gas availability in the summer months. The weaker TTF has seen discounts for LNG shrink, but the additional regasification capacity in Europe could allow for additional cargoes.

While any additional gas demand should filter into TTF prices and boost the whole complex, sources said that buyers looking to the spot market to fill any obligatory slots may have to look at near parity to acquire a cargo.

"It seems it's [NWE LNG] trading around these levels for August," a second European trader said.