Europe sees more LNG as inter-basin derivative spreads turn negative

Strong European LNG prices are attracting physical cargoes as Atlantic LNG becomes priced at a premium to Asia, altering trade flows around the Atlantic basin.

S&P Global Platts assessed the DES January Northwest European price for delivered LNG cargoes at $42.606/MMBtu Dec. 15. This reflects a $1.224/MMBtu discount to the Asian spot LNG price assessed at $41.382/MMBtu.

The JKM/TTF spread is often used as a sign of arbitrage potential between the Atlantic and Pacific basins. JKM/TTF derivatives were traded at -$0.20/MMBtu during European trading hours Dec. 16.

Inter-basin spreads have been driven into negative territory due to strong European appetite for LNG outcompeting Asian demand amid milder temperatures and well-stocked inventories in China and Japan. Japanese inventories were sitting at 2.37 million mt Dec. 12, 0.66 million mt higher than the four-year average of 1.71 million mt for the month of December, according to data from the Ministry of Economy, Trade and Industry.

European inventories were sitting at 61%, according to data from Gas Infrastructure Europe. This is 20 percentage points below inventory levels this time in 2020. The rate of inventory depletion has also increased, with December experiencing the fastest monthly rate of withdrawals in five years. Eurogas prices have further rallied on Nord-Stream 2 uncertainty and colder weather gripping the continent, bolstering domestic heating demand.

The negative spreads have made Europe the best landed market for US FOB cargoes with Northwest European prices offering the best netback to US exporters.

"Why send a US cargo to Asia and pay an extra $2/MMBtu on freight." A Europe-based trader said. "All cargoes are pointing to Europe."

Panama Canal waiting times have also fallen considerably, indicating fewer US cargoes are bound for Asia, being lured by higher landed prices in continental Europe. The waiting time for southbound cargoes fell from 13 days Nov. 15 to four days Dec. 15, according to data from the Panama Canal Authority.

LNG ships currently in the Gulf of Mexico are all bound for European destinations including Spain, Portugal and Southern France, according to data from Platts cFlow trade-flow analytics software.

Strong European prices and negative spreads to Asia have not been able to attract all Atlantic-basin procured cargoes.

Many West African LNG cargoes are still opting to land in Asian and Middle Eastern markets.

"West African cargoes need to compete with US FOB," a European trader said.

"Sellers need to meet contractual obligations in Asia," said another trader. "They still have hedges in the Far East."

According to CFlow, most West African procured cargoes are currently headed to Dahej, India with few making the journey to the Far East.

European LNG regas rises

Data from S&P Global Platts Analytics and National Grid showed that European LNG regas (Belgium, France, Italy, the Netherlands, Poland, Portugal, Spain, the UK) averaged 271 million cu m/d for the Dec. 1-15 gas days.

This compares to the 253 million cu m/d average from November and the 187 million cu m/d average from October, and comfortably higher than the 177 million cu m/d average seen during the final month of 2020, the data showed.

The recent rise in LNG regas rates has come on the back of an increase in traffic heading to Europe on the back of softer spot LNG demand from Asian markets as well as European hub pricing remaining supported due to bullish fundamentals.

In addition, demand for gas in Europe has begun to pick up as the Winter 2021 season progresses, with LDZ demand following its traditional seasonal profile as well as firm gas-for-power demand being seen due to a combination of coal-plant closures as well as weak renewable generation.

The recent increases have been seen mostly in LNG-heavy markets Spain and the UK, where both have been running around the 100 million cu m/d mark in late November and early December.