East-West LNG arbitrage strengthens as Asian demand surpasses European

The East-West LNG arbitrage economics is strengthening as wider price spreads and declining freight rates offer traders more opportunities to move cargoes to the Far East, according to data from S&P Global Commodity Insights and market feedback.

The potential netback from transporting a US-sourced cargo to the Far East has shifted from negative to positive territory, suggesting that traders may have increased opportunities to divert these cargoes and achieve higher margins.

The Platts-assessed East-West arbitrage rose to 1.7 cents/MMBtu on Sept. 17 from minus 23.9 cents/MMBtu on Sept. 10, considering the Cape of Good Hope freight rate cost for delivering a US-sourced cargo to the Northeast Asian region.

"We are seeing the East-West arbitrage marginally open now; there is a greater incentive for traders to bring cargoes to the East," a trader said.

An LNG vessel -- LNG Rosenrot -- was originally headed to Rotterdam but later diverted to Tangshan, Northern China, shipping data from Commodity Insights showed Sept. 17.

"There are cargo diversions, probably [to] Asia, on good spot demand in China. But China's demand is going to fall as JKM prices are above $13/MMBtu," an LNG analyst said, adding that Chinese buyers were cost-sensitive.

Moreover, the contango between October and November remained depressed across Northwest Europe, and the number of ships on water is still above the five-year average. Traders are seeing that increased demand in Asia is helping to absorb volumes that need to find a destination.

Platts assessed the DES Northwest European market for November at $11.775/MMBtu on Sept. 17. This is compared to the NWE October value of $11.340/MMBtu.

For now, weak demand across Europe and improving arbitrage economics have provided sufficient incentive for more supplementary flows to head to Asia.

Another trader said that for some players, the lower freight rates have already provided a strong push to send cargoes to Asia rather than Europe, with some considering the rates a sunk cost. Given these assumptions, volumes may find a destination in Asia once the continent seeks to replenish inventories, even if European prices strengthen in the near term.

Freight route costs have shown some weakness since the end of August, with the US Gulf Coast-Japan/Korea route via the Cape of Good Hope assessed at $2.80/MMBtu on Sept. 17, down 14 cents/MMBtu from Aug. 30.

Meanwhile, the US Gulf Coast-Northwest Europe freight cost remained largely stable at 87 cents/MMBtu on Sept. 17, edging 3 cents/MMBtu lower from Aug. 30.

Viability of sustained open arbitrage to Far East

Despite the arbitrage opening, the incentive to pull cargoes toward the Far East heavily relies on the magnitude of demand in the region, according to a Singapore-based trader.

"While demand in Europe is visibly weak now, Asia's demand is not that great either, apart from the recent purchases by Chinese companies. I would say it is still quiet in Asia," the trader said.

Asia's supply-demand fundamentals have remained relatively weak over the past month, as the post-summer shoulder season has stifled buying activity.

The region's demand for spot cargoes in the coming weeks will be highly dependent on temperatures as it heads into the winter season, according to market sources.

Previously, some traders anticipated that the US arbitrage to Asia would be closed for the fourth quarter, expecting a colder winter in Europe to deplete storages quickly and drive the region to replenish supply with the super-chilled fuel for heating and power generation requirements.

"It all depends on if we have a colder winter; we have had a hot summer and mild winters the last two years," another source said. "This could see Europe pull in more cargoes [compared with Asia]."

A closed US arbitrage to Asia could pose a threat to the region, depending on the scale of end buyers' demand for building inventories for winter, one trader said.

Freight route costs are also key factors in determining the viability of an open arbitrage to the Asia-Pacific basin.

Although freight rates are relatively low for this time of year, they have been slowly climbing. Expectations of strong rates for winter were adding to the weakening floating economics in Europe.

"I think freights are underdone, and for some players, that means they can take their [US] cargoes east," a European trader said. "I don't think we will see rates hit record highs again, but they will spike this winter."