European LNG trading liquidity has been lackluster for months, amid a wide spread between Platts JKM, the benchmark for spot LNG prices, and Northwest European gas prices.
But a rapid jump in Platts JKM since April 2020 has prompted prices to find a new anchor in Atlantic Basin supply reloaded out of Europe. LNG market participants explained portfolio players with shipping costs sunk into their portfolio would likely keep their sights locked into the Asia market as these players would be able to take full advantage of the arbitrage.
Prices in the Atlantic basin were only rising on the back of stronger summer values in Northeast Asia, sources said. The Platts JKM surged from a record low point of $1.825/MMBtu in April 2020, at the dawn of the global pandemic, to reach $12.404/MMBtu mid-December 2020. The last time the JKM rallied to this high was in October 2014, and at that time European reloads were being offered back to back to the Pacific.
LNG production issues in a number of regions, energy supply issues within the Pacific basin, and lack of ship availability and logistical constraints are some of the key drivers keeping the Asian JKM benchmark supported, driving demand for eastbound cargos out of Europe.
Outages and issues at key exporting projects like Gorgon in Australia, Hammerfest in Norway and some of the trains at Malaysia's Bintulu project have curtailed supply, while there have also been ongoing reports of production problems at Nigeria's Bonny facility.
On top of this, congestion through the Panama Canal, adding a week or more of extra transit time at its peak, has left Atlantic sellers with a tough choice between sending more volume via the Cape of Good Hope or accruing additional costs by going via Panama, inevitably tightening tonnage.
Shortfalls in supply have inevitably led to a scramble to acquire volume, with buyers in Pakistan and Turkey, alongside many others, not receiving any offers in recent tenders as the tightness in the spot market continues.
At the same time, market participants in the Atlantic with sufficient shipping have been heading for closer markets in South Asia in order not to tie up shipping, while still making a margin on rising prices in the Pacific.
"It has been a crazy last few days, the JKM is rallying over shipping constraints. There are no ships at all!" a Spanish LNG trader said.
Day rates for LNG charter in the Atlantic hit levels of $150,000/day towards mid-December, having started the final quarter of 2020 at just $62,000/day. Ballast rates over the same period have gone from 100% to 135% currently.
European market plugs gap
The resulting shortfall in supply is leaving a market like Asia with high volume risk, so buyers in the region are looking to source in-tank supply from a well-stocked European market to supplement production shortfalls. Spreads to Asia continue to attract reload interest for those fortunate enough to have shipping available.
"No LNG is coming and trading volumes are going down, so the market is more volatile in Europe," a second Germany-based trader told Platts.
This is also bullish for European markets, where the near-term LNG delivery outlook has dried up. Additional commercial reloads to Asia are likely to start over the coming weeks, although these will be limited by logistical constraints, according to S&P Global Platts Analytics.
Looking ahead, the arbitrage between the two basins may start to contract amid strength in the European gas market on significantly cooler weather forecasts ahead, rising freight rates and JKM starting to show a steep February backwardation. A reduced call on Atlantic Basin supply should in turn ease the shipping constraints currently dominating the LNG market, Platts Analytics says.
Indeed, despite a theoretical arbitrage and strong demand for very prompt cargoes, more balanced fundamentals have crept into the Asian LNG market in recent days owing to easing demand towards the end of Q1, with supply likely to catch up.
As the spot market heads towards March, the market should turn more bearish, shown by the roughly $3/MMBtu backwardation between the February and March JKM derivative contracts.
"This backwardation is very steep [between] February/March. Will be interesting to see how February JKM settlement outturns," an LNG trader said.
As a result, some Atlantic-based traders believe netbacks to Europe could be more favorable than to the Far East as shipping remains extremely bullish for the time being.
The response from traders in the recent days has been to cancel some US-loading cargoes for February as a result of the persisting tightness in shipping availability, with roughly five cargoes believed to have been cancelled.
Going into the new year, there is likely to be less interest in reloads and traders will instead be looking to see how they can optimize within the Atlantic, potentially continuing the disconnect between the two markets.