Closed LNG arbitrage endangers winter supply to Asia

The negative price arbitrage for Atlantic LNG cargoes into Asia since April has restricted inter-basin trade and made it more difficult for Asian consumers to access spot supply heading into peak winter season, according to data analysis and industry feedback.

While global competition for LNG cargoes this year has eased from 2022, there are lingering concerns that Asia could be starved of much needed prompt supply in the winter season should a cold snap or production issue arise.

Market participants attributed the reluctance of suppliers to divert more Atlantic LNG cargoes into Asia to high freight rates, increased European terminal capacity and the fear of disruptions to Panama Canal transits in winter.

"[We are] less likely to see US and African cargoes coming into Asia this year during the winter season as freight rates remain high," an Asian source said.

Supply uncertainties in Q3 caused by incidents like the industrial action at Chevron's LNG facilities in Western Australia have placed an upward pressure on Asian LNG prices. Platts JKM, the benchmark price reflecting LNG delivered to Northeast Asia, increased in the third quarter, with the average JKM price for Q3 at $12.52/MMBtu compared to $10.90/MMBtu in Q2, S&P Global Commodity Insights data showed.

Although recent market sentiment suggested that supply has remained relatively stable during the shoulder months with supply uncertainties mostly cleared and utilities reporting comfortable inventory levels across Northeast Asia, the market situation is expected to tighten in Q4 due to winter demand.

A Japanese source said the market may face a slight imbalance during the winter season. "Demand for spot cargoes in winter is likely to be stronger than supply," the Japanese source said.

Furthermore, a strong demand fundamental amid closed Asian arbitrages could put Asia's supply security at risk as utilities struggle to procure spot cargoes for prompt delivery, sources said.

Floating storage would be an integral source of supply for Asia should utilities require emergency cargoes during the winter season.

The closed Asian arbitrages and relatively wide intermonth contango in LNG prices are continuing to incentivize traders to build a strong floating LNG storage. The current floating storage level in September is expected to reach May's high when the arbitrage window was marginally open, sources said.

However, Atlantic traders expect less willingness among sellers from the US and Africa to float volumes due to strong prompt prices and high storage levels in Europe.

Floating storage is defined as the total volume of LNG that is more than the volume of 15 million mt that is usually in transit.

As of Sept. 28, the total volume of LNG that was in floating storage stood at 2.6 million mt globally.

Temperatures will also be key for the Asian LNG market this winter as the market grapples with a limited pool of cargoes. "If temperatures during the winter season are more extreme, procurement for spot cargoes will be necessary," a market source said.

However, a Chinese source said that cargoes from the US and Africa may flow into Asia during the upcoming winter season as buyers become more active in the spot market, easing supply tightness. "Buyers [in Asia] will pay a good spread to sellers, while Europe's demand remains weak," the Chinese source said.

Asia-Europe arbitrage for Atlantic volume shut

The arbitrage window between the US and Asia remained closed with the H1 September JKM/H2 September NWE spread against the USGC-to-North Asia/Northwest Europe freight rate marked at minus 59.50 cents/MMBtu on Sept. 29, Platts data from S&P Global showed.

Similarly, the arbitrage window between Africa and Asia remained closed with the H1 September JKM/H2 September NWE spread against the Nigeria-to-North Asia/Northwest Europe freight rate being marked at minus 98.50 cents/MMBtu on Sept. 29, indicating a discount for cargoes coming to Asia compared to Europe.

"The East-West spread for November is only around 50 cents/MMBtu; it seems like Europe may take more cargoes this coming winter compared to Asia," a Singapore-based trader said.

A second trader said the East-West spread needs to be at least $1.50/MMBtu for arbitrage opportunities to emerge.

The narrow spread has encouraged some companies to send cargoes to Europe rather than Asia in the last two quarters.

As of Sept. 29, the total imported volume in Q2 and Q3 from the US in Europe surpassed that of Asia at 16.73 million mt compared to 6.71 million mt. Similarly, cargoes coming from African sources were mostly flowing into Europe rather than Asia at 3.74 million mt compared to 3.16 million mt, S&P Global data showed.

The lack of arbitrage opportunities for bilateral spot trade was also observed in the physical Platts Market on Close assessment process, as the number of US base load port nominations in offers was lower in recent months.

In Q3, only 13 out of 139 reported offers nominated US base load ports. In comparison, 62 out of 266 reported offers nominated US base load ports in Q3 2021 when the US-Asian arbitrage was open.

Meanwhile, the Middle East-Asia and Australia-Asia arbitrage windows have largely remained open throughout the year, with the majority of their export volumes flowing into Asia rather than Europe.

While the arbitrage window remains closed, attempts to send cargoes from the Atlantic basin into the Far East were observed by some market sources due to the strong spread between Asian LNG and European gas prices. "Might be sellers looking for opportunistic buyers rather than to fulfil real demand," a market source said.