Global spot LNG prices begin to converge

Weak demand across the traditional markets in northeast Asia, coupled with readily available short-term supply, has led to a decline in arbitrage opportunities between the Atlantic and Pacific basins.

A lack of cross-basin arbitrage opportunities mean that volumes sourced in the Atlantic basin, which are typically diverted to buyers in Asia, could head for their original homes instead.

In an oversaturated market, sellers have shifted their attention from the traditional buyers in Japan and South Korea to other demand centres.

“We are facing a situation, where it is no longer profitable to divert a cargo from Nigeria to Japan,” one Europe-based seller said.

While traders identified $4.00/MMBtu as the next point of resistance for global spot LNG prices, some buyers have forecast price scenarios well below this level.

“We are already seeing offers in low $4.00s/MMBtu for the summer months and have heard of some below that level for July,” one portfolio seller said.

Overall, spot prices are expected to be in backwardation at least through October, the seller said, and there are no guarantees that they will rebound by next winter.

US volumes to add more pressure

The delivery of flexible LNG volumes to the hub-linked markets could put spot LNG prices under further pressure if the gas hubs serve as a reference point for global LNG trades.

The likelihood of this is likely to increase when the LNG projects in the US Gulf export more cargoes.

US-based exporter Cheniere expects its newly-started Sabine Pass’ train 1 to produce up to eight cargoes over the next 60 days. When fully operational from May onwards, the first train could produce six cargoes every month. More production is likely if Sabine Pass starts up its second train in August as expected.

UK-based portfolio seller BG Group, which has merged with Royal Dutch Shell, is the long-term offtaker of the train 1’s volumes and the take-or-pay FOB (free on board) contract will commence later this year.

As both a buyer and seller, BG Group faces variable and fixed costs. The pricing formula for the US Gulf volumes is 115% of the Henry Hub price, a fixed component of about $2.25/MMBtu plus the cost of shipping.

While it is difficult to determine BG Group’s cost of shipping because of its LNG fleet composition, current charter rates indicated $0.40-0.50/MMBtu to transport a US cargo to northwest Europe. Based on a $2.00/MMBtu Henry Hub price as a proxy, the overall cost of shipping a US cargo would amount to $4.95/MMBtu.

In theory, a seller will need only to find a buyer that pays above $2.70/MMBtu to offset the fixed cost, which in the case of BG Group, is required to pay whether it takes the cargo or not.

While a seller of US volumes will, no doubt, aim to find a market with the best netback opportunity, this additional supply will put more pressure on the short-term market. Physical and time swaps are already being discussed in the market.

The uneven supply-demand fundamentals could also push more sellers to explore the option of ‘dumping’ any excess LNG volumes in the European gas hubs, which would come under pressure.

Traders said there has been increased activity in the derivatives market with LNG sellers looking to lock in their risk ahead of such a scenario. Derivatives trades are mainly done on the UK’s NBP and the TTF in the Netherlands.

The pressure on prices in the gas hubs could be exacerbated by increased exports to Europe from traditional producers such as Qatar.

Some markets could ease oversupply

Contra-seasonal markets typically provide some support for summer pricing, but it might not be sufficient to stop a price fall this year, traders said.

The next few months could see production from Australia, US Gulf and Angola drive spot prices further down, but expectations are that it can be offset with demand from the Middle East. Argentina and India.

While total contra-seasonal demand is unlikely to amount more than 12 cargoes every month over the whole summer, India is expected to procure 3-4 spot cargoes every month in the same period.

The south Asian country typically sees weak demand during the monsoon season, but it is likely to continue importing spot LNG this summer because of the low prices.

LNG importers, such as GAIL and GSPC, have seen an expansion in India’s domestic gas distribution network and their downstream customer base. A low LNG price makes spot imports a sensible option for Indian buyers trying to improve their economics on feedstock over the coming months. roman.kazmin@icis.com