Europe gas hubs surge as US LNG cargoes go global

Northwest European natural gas hub prices rose to a rare premium to east Asian and South American LNG spot indices on Tuesday and Wednesday because of cold European weather, supply outages and a reaction to plans for a French carbon floor tax from 2017.

The move comes despite a recent increase in Asian LNG spot buying interest and a buy tender from Argentina. Several Asian buyers have also taken advantage of lower LNG spot prices relative to long-term contracts to cover summer positions.

By Wednesday morning, the British NBP June contract was trading at 31.33p/th, or $4.57/MMBtu with the Dutch TTF at €14.10/MWh, or $4.68/MMBtu. This compared with the ICIS East Asia LNG index for June at $4.43/MMBtu and the ICIS South American index at $4.46/MMBtu.

Since the global recession of 2008-2009, European gas prices have failed to sustain any rare premium to those in Asia. Higher oil-indexed LNG contracts and LNG demand have sustained Asian spot LNG prices with European gas demand never recovering to pre-crisis levels.

The LNG market remains in backwardation for the summer and is likely to remain oversupplied with new Australian and US LNG production due to come online. Buyers in Japan and Taiwan have recently approached the market for short-term cargoes either on a fixed price or oil-indexed basis but this has been offset by a fresh sell tender by the Russian Sakhalin project in July.

European gas markets have risen across the curve as a result of oil price increases, which still have a part to play in some long-term gas contracts, and gas traders closing predominantly short positions after a run of heavy price decreases.

An announcement that France will introduce a price floor on domestic carbon emissions pushed up mainland European power curve prices on Tuesday which also had a bullish impact on associated gas markets.

US LNG already global

The rise in European gas prices and the $7-8/bbl increase in Brent crude since the start of April have opened up the spread to flatter US Henry Hub prices which underpin the cost structure of new US LNG exports.

The first LNG export cargoes from Cheniere’s Sabine Pass plant have already made a global footprint, heading to South America, Europe, the Middle East and Asia.

Recent Henry Hub prices have hovered around $2/MMBtu which would give a feedgas cost for LNG of around $2.30/MMBtu based on the cost of bringing the gas to the plant and before factoring in liquefaction and shipping costs.

Currently only Cheniere is supplying cargoes from its own position at Sabine Pass and does not pay an explicit cost for liquefaction, unlike future offtakers.

Excluding liquefaction costs, current Henry Hub prices would allow for some margin for LNG delivery into Europe but this would disappear if liquefaction costs of $2.25-2.50/MMBtu are added.

Future Henry Hub prices are also in contango, currently trading above $2.50/MMBtu for October ‘16 and above $3.00/MMBtu for some of the next winter months.

The NBP Winter ’16 price closed on Tuesday at $5.52/MMBtu which would not be sufficient to cover the US free on board (FOB) LNG price factoring in Henry Hub and any liquefaction costs.

Future Sabine Pass offtakers may, however, consider the total US FOB price – including Henry Hub gas and liquefaction – as a sunk cost because they will be packaged together as part of take-or-pay contracts.

A sustained global LNG oversupply could lead to a rise in LNG deliveries into Europe as a market of last resort, which in turn could put a ceiling on hub prices. ed.cox@icis.com