Firm European LNG premium preventing cargo inflows to region: trade

Strong delivered LNG prices in Europe -- with levels having sustained their longest-lasting premium to the key Dutch TTF gas hub -- are preventing marginal supply of LNG from reaching the region's terminals, according to market participants active in the region, adding that this is also prompting further surges in gas hub prices.

On average in Q3, the Platts DES Northwest Europe LNG Marker (NWE) has been $0.116/MMBtu above the relevant TTF monthly contract, versus an average of minus $0.0923/MMBtu in Q2 2021. The premium is due to Europe having to fiercely compete with Latin America, within the Atlantic Basin, and North Asia, whose demand has reached record highs in every month in 2021.

Other than for five days since June 8, Platts NWE LNG has been above TTF levels. This means that on all other days buyers of spot LNG cargoes are having to pay over the hub price to import a cargo of LNG, before taking into account terminal capacity and regasification costs. It is no coincidence that LNG imports to Europe have slumped year-on-year during this period, with July being 4.6 million mt versus July 2020 and August being only 4.85 million mt versus 5.73 million mt last August, according to Platts Analytics data. This comes at a time when storage levels are at unprecedented lows.

According to AGSI, the level of volume in Dutch storage sits at 74.7681 TWh, which is just over 50% full. However, it is also approximately half the volume in tank compared with the same period on 2020, with withdrawal season now just two weeks away.

This has limited spot trade into the north of continental Europe. Transactions have been seen into southern Europe, including some heard trades at $0.30/MMBtu over TTF into Turkey for Q4 deliveries. This price level was also heard prevailing into Brazil during peak summer month trade, according to market data collected and published by Platts.

Amid fears of a lack of winter supply, the TTF October has shown a tremendous gain in recent weeks, reaching an intraday peak of roughly $27.40/MMBtu during the morning trade of September 15, showing a strong on-day gain from the previous day's Platts assessment of $22.883/MMBtu.

The Platts DES Northwest Europe was assessed at $23.049/MMBtu, or at around $0.16/MMBtu above TTF, on Sept. 14, making it the highest level since Platts began assessing this market in 2010.

Market participants cited other drivers for these TTF gains as concerns over when the new Nord Stream 2 pipeline will start delivering volume, as well as a fire at a UK-France power interconnector adding to the bullish sentiment.

Outright price risk

This has left LNG traders in Europe struggling for options, as the outright price risk becomes ever greater, leaving most looking to alleviate matters through spread trading to limit the downside risk on their freight differentials.

"JKM vs [TTF expressed in US dollars/MMBtu] has been busier. I think the volatility in the TTF is making people want to lock that leg in same time they trade the JKM," said a broker source.

"Period spreads have been extremely busy: Nov v Dec, Dec v Jan, Nov and or Dec v March," the source said.

Exchange data illustrates the higher proportion of inter-month spread trading and inter-product trading (JKM vs TTF), which indicates a reticence to take outright price risk at these historically high levels, according to one LNG trader.

Sept. 15 saw the first sign that high outright price levels in Asia could lead to changes in European LNG market dynamics though. Until Sept. 15, JKM had matched TTF gains, but the JKM December derivatives contract showed steeper losses both versus TTF December and JKM November. Indeed, the JKM November-December spread flipped to a backwardation of $0.125/MMBtu Sept. 15 from a contango of $0.40/MMBtu on the previous evening, before moving back to a 5 cents/MMBtu contango in the afternoon of Sept. 15. The JKM December-TTF December differential also narrowed significantly to $1.95/MMBtu in trades Sept. 15 versus $2.20/MMBtu in trades on the day before.