European LNG premium to hub gas widens amid competition from JKTC, LATAM

European LNG volumes have risen to a premium of 20 cents/MMBtu to the TTF month-ahead natural gas contract amid strong competition from a tight market in Northeast Asia and persistent demand from South America.

The Platts DES Northwest Europe was assessed at $11.343/MMBtu on June 25, the highest level since October 2014, with the cargo price premium to the TTF hub growing alongside this price rally.

Prior to June 9, the delivered price of a cargo into Europe had spent 84 days trading at a discount to hub levels.

The last time there was a sustained period of cargoes into Europe being priced above TTF was at the start of Q1 this year, when Japanese utilities found themselves without ample supply to face a cold snap, with the effects of Norwegian production issues meaning European buyers had to compete for less volume against a surging JKM.

As well as this, the sharp drop in temperatures during this period in parts of the US, including Texas, meant the Henry Hub price gained support, leading some Atlantic traders to sell back into the hub, thus limiting European buyers' ability to secure volume.

Buy-side interest has developed in Asia as Japanese utilities look to bolster supply for summer, alongside other markets in south and southeast Asia looking to procure volume. Previously, buyers have been hesitant to enter the market amidst a rally to compete against strong Northeast Asian pricing. Market participants in Asia also observed gains in Eurogas, a driver for offer levels into the market.

According to Platts data, the DES NWE for H1 August stood at a discount of $1.526/MMBtu to the H2 August JKM on June 25, with the spread having widened between the two markers by 10 cents/MMBtu over the past week.

"The arb is open, there is no reason for a seller to offer down," said one London-based trader.

As a result, book-outs for late July/August delivery cargoes into Europe have been reported as well as reloads out of the more well supplied Spanish market, as portfolio players look to optimize the steady gains seen in Asia.

South America

In South America, lower-than-average hydro reservoir levels have meant strong prompt demand for volume, with cargo prices into Brazil valued up to TTF plus $0.30/MMBtu, as well as ongoing winter procurement from Argentina.

Argentina's IEASA recently closed a tender for five partial cargoes into Escobar and Bahia Blanca for August/September delivery at $10.80-11.20/MMBtu, according to market sources. At the time of close (June 15), the H1 August DES NWE was at $9.936/MMBtu.

It has not only been landed prices that have jumped in response to gains in alternative markets, Eurogas has been well supported by news of a lack of LNG arrivals, on top of lingering concerns over low storage levels in tank (roughly 45%). As a result, prices for both NBP and TTF hubs hit 13-year highs in recent days.

Delivered European prices spent the better part of 2020 at discounts to TTF despite potential premiums in regional hubs in the Mediterranean such as PVB or the UK's NBP, which usually price at a premium to TTF in the winter owing to shortfalls in storage capacity. However, owing to sharp declines in global demand on the back of the global pandemic, the DES Northwest Europe fell to its lowest ever level of $1.343/MMBtu on May 28, 2020.

However, going forward, with the freight market showing signs of gains, there could be more pressure from Atlantic sellers with surging underlying Eurogas values giving yet more justification to elevated offers. According to Platts data June 25, the Atlantic shipping rate was valued at $80,500/day, whereas the Asia Pacific rate came to $68,500/day as tightening availability for spot voyages supports the Atlantic freight market.