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European LNG volume deliveries to see muted downside despite Feb netback flip

Highlights

USGC February netbacks heavily slanted toward Asia

Large Asian volume risk, minor spot LNG demand

Europe to tighten stranglehold in coming months

Europe's position as the prime destination for spot Atlantic-produced LNG volumes is due to continue into February despite the fact that European hub pricing for next month has widened its discount to the Asian peer in recent months, flipping netbacks toward Japan and South Korea, an analysis by S&P Global Platts showed.

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Europe has enjoyed record deliveries of LNG volumes in recent months, as the combination of weak spot LNG demand in Asia allied to stronger global production of the commodity has led to Europe becoming the destination of choice for Atlantic producers rather than the destination of last resort.

However, with European hub pricing currently weak for February -- the NBP February contract is currently trading below the 30 pence/therm mark -- and the Asian JKM February contract having been stable at $5.30/MMBtu recently, netbacks for the month-ahead delivery period have shifted back toward Asia.

The netback for LNG produced from the US Gulf Coast to be sent to Japan/South Korea for February delivery stood at $3.330/MMBtu on Tuesday in comparison to the Northwest European equivalent of $2.774/MMBtu.

Furthermore, netbacks from both Nigeria and Trinidad and Tobago are also in favor of Asia over Europe for February delivery, and the Algerian netback for both regions is close to parity, contrary to the figures seen at the beginning of the year.

Limited scope

LNG market participants reported bids for cargoes to be bought back from buyers in Europe for delivery in late January/early February over the past few weeks, with values quoted at approximately a $0.03-0.04/MMBtu premium to delivered Northwest European LNG prices for the period.

However, LNG market sources added that the opportunity for such transactions was very narrow due to the difficulty in logistics, stating that only the large portfolio parties and majors had the tonnage and volume on hand to target the Pacific.

"The numbers have to make sense though, because it might not be worth unwinding your Atlantic rotation," said one London-based LNG trader.

Atlantic basin market participants also cited the risk in diverting cargoes into the Pacific, as demand was unlikely to be sufficient to absorb volume.

Given the lack of a downstream Asian market, sellers would find it difficult to find a home for volume despite the attractive price spreads, unlike Europe, where there is sufficient depth in the downstream market.

As a result, there is a strong element of volume risk on Asia, as players would not be able to deliver a cargo into a market that has seen very comfortable winter temperatures so far.

"The opportunity might not be available to everyone and the depth might not be there for anyone else," said another trader in London.

According to Platts tracking data, there have been vessels that were initially diverted into the Pacific after loading in the US Gulf Coast, only to return across the Atlantic to Europe.

The Total-controlled LNG Jurojin was shown by tracking data to have loaded a cargo from the US Gulf on January 4 with an expected destination of Rotterdam, before travelling south toward the Panama Canal -- the vessel turned away from the Panama Canal and headed back across the Atlantic on January 10, and is now slated to arrive in Northwest Europe.

Moreover, the focus back towards Europe is likely to strengthen during the months to come, with the JKM March contract having been assessed at $4.625/MMBtu on Tuesday -- a solid $0.675/MMBtu discount to February -- and with the TTF equivalent at a mere $0.016/MMBtu discount, swinging the netbacks back in Europe's favor toward the end of the Q1 2020 delivery period.

In addition, the swing toward Europe looks set to gather further momentum during the next summer delivery period, with the USGC/NWE netback for Q2 2020 delivery assessed at a robust $0.621/MMBtu premium to the USGC/Japan-Korea equivalent.