LNG cargoes diverge from fuel hubs amid logistical constraints, Ukraine warfare

World LNG cargo costs have moved collectively in a slender band within the second quarter whereas the world’s main fuel hubs – Henry Hub and the Dutch Title Switch Facility – are at traditionally divergent worth ranges from one another.

Key in bringing LNG costs collectively is weak demand in North Asia, the world’s predominant consuming area, in addition to sturdy demand in Europe because of the coverage pivot in direction of LNG and away from Russian pipeline fuel.

The US FOB LNG market, mirrored by Platts Gulf Coast Marker, is transferring in sympathy with these two principal demand areas as offtakers search the most effective returns for his or her time period cargoes.

Supply: S&P World Commodity Insights

In the meantime, Henry Hub and TTF – the 2 most-traded fuel hubs regionally – stay distant from one another. June 16 – when TTF reached a premium of $29.614/MMBtu in opposition to Henry Hub – noticed the widest distinction since April 4 because of lowered pipeline flows from Russia to Europe and the prolonged outage at main US liquefaction terminal, Freeport LNG, shutting fuel away from the LNG export market.

The broad distinction between TTF and Henry Hub, which has averaged $22.379/MMBtu in Q2, displays logistical constraints on each side of the Atlantic: from the US there may be inadequate liquefaction capability to fulfill the potential demand, and in Europe (at the least in North European nations excluding the UK) there may be inadequate regasification capability to match the continent’s daring goal of accelerating imports by 40 million mt in 2022.

Whereas the outage at Freeport knocked costs down 20% in every week, the pattern is for significantly extra fuel to be funnelled to LNG export terminals within the medium time period. Certainly, the US benchmark stays 95% increased than at the beginning of 2022. In a state of affairs that can be acquainted to European fuel customers, fuel storage ranges are working low relative to historic averages within the US and Canada, whereas LNG exports are straining to make use of each share level of nameplate capability at liquefaction terminals – after which some.

In a market the place capability utilization at terminals is excessive, securing a slot at these services turns into extra of a spotlight and might turn out to be costlier. A part of the rationale LNG import costs to Europe dumped to a report $10/MMBtu low cost to TTF in early Might, or over 30% of the worth of an LNG cargo, was as a result of the price to safe a slot at LNG terminals in key demand areas in Europe elevated to as a lot as $7/MMBtu, in comparison with a long-term capability price of round $0.30-$1/MMBtu.

For many of 2021, Platts DES NWE was assessed at a premium to TTF because of a robust demand pull for LNG from North Asia and Brazil. European LNG worth differentials to TTF have been inversely correlated with the extent of imports into the continent. When LNG cargoes had been buying and selling at a premium to TTF, there was nonetheless a value to terminal capability, however there have been very low imports as a result of 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 entry.

Whether or not LNG imports are at excessive or low ranges into Europe terminal prices should not the only real determinant of the differential to the fuel hub worth. Different elements embrace the differentials at different fuel hubs in Europe (i.e. NBP vs TTF) and the basics at competing LNG import markets, similar to North Asia, Latin America, East Mediterranean.

Whereas LNG costs have diverged considerably from European fuel costs in Q2, weakening the correlation between TTF and LNG cargo costs, the connection between LNG cargo costs has remained extraordinarily sturdy, with DES markets transferring inside a really tight band.

This has been an expression of the comparatively weak demand in North Asia, particularly China – hitherto the world’s largest spot purchaser whose imports have dropped circa 20% on-year – in addition to Europe’s want for near-term LNG imports to deleverage dependence on Russian pipeline fuel. JKM solely briefly rose sufficiently to start out attracting cargoes from the world’s largest LNG exporter – and largest swing provider – the US in late-Might and early-June as some main consumers emerged to restock with summer season cargoes.

In actual fact, for all the primary benchmarks which can be used to cost LNG, solely DES Europe (Platts NWE) and DES North Asia (Platts JKM) and FOB US (Platts GCM) have r-squared values above 90% in 2022, in accordance with S&P World Commodity Insights knowledge.

Henry Hub has a destructive easy correlation to JKM (implying that when JKM decreases, Henry Hub will increase). Brent crude has a particularly weak easy correlation to JKM of 38% in 2022 up to now. The consensus view has been that Henry Hub’s correlation will begin to tighten with world LNG because the US turns into a much bigger a part of the market, however the US is exporting 30% extra LNG up to now in 2022 than final yr and is already the biggest producing nation, whereas the correlation to worldwide LNG costs has turn out to be considerably weaker.

Supply: S&P World Commodity Insights

So, how lengthy will European and North Asian LNG costs stay so tightly intertwined?

The easy reply is so long as Europe has a robust want for spot LNG and North Asian demand just isn’t making a “name” on swing provide. Have been Asian LNG demand to return to a year-on-year progress path once more, there can be upward strain on outright LNG costs into Europe, and in addition European fuel hub costs. This has been borne out with the Freeport outage there was some larger urgency to Asia’s spot LNG imports because of short-covering, which tightened the differential between JKM and TTF, however now that outright costs have risen into the $30s/MMBtu, the differential has began to widen as soon as extra.

And the way lengthy will LNG costs be discounted to European fuel?

The ahead curve offers a convincing response to that query: as of mid-June, it’s not till Cal-25 that JKM begins to cost at a premium to Dutch TTF. Should you had requested any market participant if this had been attainable even a yr in the past, the reply would have been a convincing, “no”.