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LNG cargoes diverge from gas hubs amid logistical constraints, Ukraine war

  • Featuring
  • Ciaran Roe
  • Commodity
  • LNG
  • Topic
  • LNG Commoditization War in Ukraine

Global LNG cargo prices have moved together in a narrow band in the second quarter while the world's major gas hubs – Henry Hub and the Dutch Title Transfer Facility – are at historically divergent price levels from each other.

Key in bringing LNG prices together is weak demand in North Asia, the world's main consuming region, as well as strong demand in Europe due to the policy pivot towards LNG and away from Russian pipeline gas.

The US FOB LNG market, reflected by Platts Gulf Coast Marker, is moving in sympathy with these two principal demand areas as offtakers seek the best returns for their term cargoes.

Gas/LNG Benchmark Q2 averages ($/MMBtu)
Henry Hub $7.54
Dutch TTF $30.05
Platts JKM $25.22
Platts DES NWE $24.40
Platts GCM (FOB) $23.22

Source: S&P Global Commodity Insights

Meanwhile, Henry Hub and TTF – the two most-traded gas hubs regionally – remain distant from each other. June 16 – when TTF reached a premium of $29.614/MMBtu against Henry Hub – saw the widest difference since April 4 due to reduced pipeline flows from Russia to Europe and the extended outage at major US liquefaction terminal, Freeport LNG, shutting gas away from the LNG export market.

The wide difference between TTF and Henry Hub, which has averaged $22.379/MMBtu in Q2, reflects logistical constraints on both sides of the Atlantic: from the US there is insufficient liquefaction capacity to meet the potential demand, and in Europe (at least in North European countries excluding the UK) there is insufficient regasification capacity to match the continent's bold target of increasing imports by 40 million mt in 2022.

While the outage at Freeport knocked prices down 20% in a week, the trend is for considerably more gas to be funnelled to LNG export terminals in the medium term. Indeed, the US benchmark remains 95% higher than at the start of 2022. In a situation that will be familiar to European gas users, gas storage levels are running low relative to historical averages in the US and Canada, while LNG exports are straining to use every percentage point of nameplate capacity at liquefaction terminals – and then some.

Graph: LNG terminal capacity utilization

In a market where capacity utilization at terminals is high, securing a slot at these facilities becomes more of a focus and can become costlier. Part of the reason LNG import prices to Europe dumped to a record $10/MMBtu discount to TTF in early May, or over 30% of the value of an LNG cargo, was because the cost to secure a slot at LNG terminals in key demand areas in Europe increased to as much as $7/MMBtu, compared to a long-term capacity cost of around $0.30-$1/MMBtu.

For most of 2021, Platts DES NWE was assessed at a premium to TTF due to a strong demand pull for LNG from North Asia and Brazil. European LNG price differentials to TTF have been inversely correlated with the level of imports into the continent. When LNG cargoes were trading at a premium to TTF, there was still a cost to terminal capacity, but there were very low imports because to import an LNG cargo at TTF+ would have resulted in a loss for the importer after accounting for the terminal slot, regasification and grid access.

Whether LNG imports are at high or low levels into Europe terminal costs are not the sole determinant of the differential to the gas hub price. Other factors include the differentials at other gas hubs in Europe (i.e. NBP vs TTF) and the fundamentals at competing LNG import markets, such as North Asia, Latin America, East Mediterranean.

Graph: Platts DES NWE vs TTF

While LNG prices have diverged significantly from European gas prices in Q2, weakening the correlation between TTF and LNG cargo prices, the connection between LNG cargo prices has remained extremely strong, with DES markets moving within a very tight band.

This has been an expression of the relatively weak demand in North Asia, especially China – hitherto the world's largest spot buyer whose imports have dropped circa 20% on-year – as well as Europe's need for near-term LNG imports to deleverage dependence on Russian pipeline gas. JKM only briefly rose sufficiently to start attracting cargoes from the world's largest LNG exporter – and biggest swing supplier – the US in late-May and early-June as some major buyers emerged to restock with summer cargoes.

In fact, for all the main benchmarks that are used to price LNG, only DES Europe (Platts NWE) and DES North Asia (Platts JKM) and FOB US (Platts GCM) have r-squared values above 90% in 2022, according to S&P Global Commodity Insights data.

Henry Hub has a negative simple correlation to JKM (implying that when JKM decreases, Henry Hub increases). Brent crude has an extremely weak simple correlation to JKM of 38% in 2022 so far. The consensus view has been that Henry Hub's correlation will start to tighten with global LNG as the US becomes a bigger part of the market, but the US is exporting 30% more LNG so far in 2022 than last year and is already the largest producing nation, while the correlation to international LNG prices has become significantly weaker.

Benchmarks Correlation 2021 2022
Henry Hub vs Platts JKM Simple correlation 77% -29%
R-squared 60% 8%
Platts NEW vs TTF Simple correlation 99% 89%
R-squared 99% 89%
Platts JKM vs Platts NEW Simple correlation 98% 98%
R-squared 96% 95%
Dated Brent vs Platts JKM Simple correlation 62% 38%
R-squared 39% 14%

Source: S&P Global Commodity Insights

So, how long will European and North Asian LNG prices remain so tightly intertwined?

The simple answer is as long as Europe has a strong need for spot LNG and North Asian demand is not making a "call" on swing supply. Were Asian LNG demand to return to a year-on-year growth path again, there would be upward pressure on outright LNG prices into Europe, and also European gas hub prices. This has been borne out with the Freeport outage there has been some greater urgency to Asia's spot LNG imports due to short-covering, which tightened the differential between JKM and TTF, but now that outright prices have risen into the $30s/MMBtu, the differential has started to widen once more.

And how long will LNG prices be discounted to European gas?

The forward curve gives a resounding response to that question: as of mid-June, it is not until Cal-25 that JKM starts to price at a premium to Dutch TTF. If you had asked any market participant if this were possible even a year ago, the answer would have been a resounding, "no".