Will the renewed flow of LNG into Europe continue?

01 Oct, 2012

Q3 2012 has seen a rapid rise in the volume of LNG cargoes flowing back into North West Europe.   This has been driven by a significant re-convergence in global LNG prices, led by a sharp decline in spot Asian LNG prices from 18 to 13 USD/MMBtu.  We have already explored the factors behind the decline in Asian prices.  But it is also interesting to take a look at the shift in locational price differentials that are influencing the flow of gas into North West Europe.

LNG spread convergence

The Reuters European power and gas team publish a lot of timely information on what is happening in traded energy markets.  The chart below is a good example.  It provides a useful overview of the LNG price spread differentials between the UK and alternative cargo destinations, based on data assessments from Waterborne.

Chart 1: LNG netback price spreads for the UK (Source: Waterborne, Reuters)

The price differentials shown are an estimate of the margin that can be obtained by bringing LNG into the UK versus selling it in alternative markets (e.g. Spain, Japan, India, Korea).  Prices are shown on a netback basis accounting for estimated transport costs between different production and supply locations.  The chart focuses on the UK but similar differentials apply across North West Europe e.g. for LNG sold at TTF via the GATE terminal in Rotterdam.


Will LNG continue to flow into North West Europe?

Chart 1 illustrates the rapid compression in locational spreads that has occurred as surplus cargoes have come into the LNG market in Q3 2012.  Under current market conditions, the relatively liquid NBP and TTF hubs are an increasingly attractive home for Atlantic sourced cargoes.   However differentials for Qatar, the world’s largest LNG exporter, still clearly favour a flow of gas to Asia.

The recent flow of cargoes back into North West Europe is not necessarily a situation that will remain.  Most LNG is under long term contracts (as we set out last week).  So a relatively small portion of LNG cargoes are traded in the spot market, either as uncontracted cargoes or as diversions of contracted cargoes. 

Given the dominance of oil-indexation in LNG contracts, the price of Brent crude is still a key driver of the pricing and opportunity cost of LNG cargoes.  While the Brent price accompanied spot Asian LNG prices lower in June (towards $90/bbl), it has since recovered (to around $110/bbl).  Oil-indexed LNG contract prices will have recovered accordingly.

Coming into winter 2012/13 the flow of cargoes into North West Europe is likely to depend on two key factors: Asian demand and crude oil prices.  If Asian demand remains subdued and crude prices resume their slide, then there may be a more prolonged convergence of LNG price spreads and flow of cargoes into Europe.  However if Asian buyers return to the LNG spot market to hedge winter load and crude continues its recovery, the flow of LNG into North West Europe may quickly dry up.


Relevant Articles:

Building LNG supply chain value

5 key drivers of global LNG market evolution

European gas pricing dynamics in the global context