An increasing number of US LNG cargoes are being sent to Europe and the Atlantic basin rather than destinations in Asia as the price spread between Asian and European spot prices has risen to a record $14.5/MMBtu, according to traders and market sources.
Receive daily email alerts, subscriber notes & personalize your experience.Register Now
This week alone, at least five LNG cargoes headed to Asia were diverted to European ports, including cargoes loaded from Equatorial Guinea, Nigeria's Bonny LNG terminal, and US LNG terminals, shipbrokers said.
The diversions mean Asia could see fewer LNG inflows in coming weeks while spot prices remain significantly below Europe, possibly until a sharp drop in temperature forces importers like Japan and South Korea to compete for spot cargoes.
The spread between JKM in Asia and the Dutch TTF gas hub widened to $10/MMBtu on Dec 21, with one major Chinese end-user saying it was wide enough to incentivize loadings from Southeast Asia and Australia to the Atlantic on paper, although the reversal in shipping flows has not reached such extreme levels.
"The economics support reverse flows now, but there is a pecking order," a Pacific basin producer said. "The whole world is sending volume to Europe now. US and Middle East volumes will be more competitive. But things can change suddenly, if a cold front hits Asia and cargoes are already flowing to Europe."
A Singapore-based trader said market participants were pulling cargoes to Europe, and there was no buying in Asia, including the absence of any short-covering, despite the onset of winter in China and Japan.
China-based importers and national oil companies said they were well-supplied for an acute winter after the market volatility and bottlenecks of last winter, leaving them with healthy inventories even up to February.
However, even with a wide arbitrage, many Asian importers are unlikely to divert their surplus LNG shipments to Europe readily, given that winter conditions can change quickly and most utilities do not wish to be caught on the back foot.
Gas storage constraints in Asia continue to be a problem, leaving importers with a very narrow buffer to optimize deliveries. Utilities in Beijing said they have LNG storage buffer of less than a week, while Japanese terminals can sustain supply for at least two weeks if downstream demand were to spike sharply.
"I wonder how sustainable these diversions to Atlantic will be though. We have diverted one back to Europe as well," a Singapore-based trader said.
A shipbroker said the volume of LNG on the water had dropped significantly from October-November levels, indicating that the bulk of LNG cargoes in transit had largely been delivered. Hence, Asian utilities were right to hold on to surplus volumes instead of rushing to resell, as the market's ability to respond to sharp changes in temperatures remains limited.
Meanwhile, a drop in LNG spot shipping rates is helping arbitrage into Europe from the Atlantic basin and Middle East suppliers. Day rates fell to $115,000/day in the Pacific basin on Dec. 21, from as much as $320,000/day at the end of November, S&P Global Platts data showed.