US LNG and Henry Hub to alter European trade dynamics

Jake Horslen

12-May-2016

The growing availability of US LNG will increasingly shape gas trading in Europe, delegates at the Flame conference in the Netherlands have said.

The impacts could be wide-ranging and affect liquidity and price trends at major hubs but also physical flows within Europe and therefore intra-European bases between different markets.

There was strong consensus among analysts at the conference that current price signals suggest US LNG will indeed result in additional volumes reaching Europe in the coming years. Three separate analysts at Flame highlighted the favourable NBP price premium to the US Henry Hub that is still open, based on the value of contracts at both hubs several years ahead on the forward curve.

“There is still money to be made on a true variable-cost basis [looking at the two forward curves] and this is a pretty strong signal that gas will flow,” said Olly Spinks, director at energy consultantcy Timera Energy.

LNG factor

Additional volumes landing in Europe may boost liquidity and cap prices at Europe’s major hubs, but other delegates said that US LNG would influence trading in Europe whether it was delivered or not.

“From a trading perspective it is not that important to speculate – if it comes it comes and if it doesn’t come then the liquidity is still there. People will forward sell [in Europe] to secure their financial exposure and then optimise,” Vattenfall head of origination, Lars Maehl, said.

The NBP and TTF both have enough liquidity in their forward markets to enable LNG suppliers to hedge volumes and preserve optionality in their portfolios. Selling LNG volumes forward at these hubs secures a destination for the volumes, but these positions can be exited with relative ease and without incurring big losses due to high levels of liquidity. This means that the volumes traded in Europe could still be sold elsewhere – i.e. Asia, South America – if a more profitable destination presents itself closer to delivery.

“There is nowhere else to do this hedging,” head of European gas at Trailstone, Didier Magne, told the conference, referring to the lack of a liquid hub in Asia.

US influence

In recent months there have been signals to suggest this hedging is already taking place in Europe. In November 2015, far-curve traded volumes at the TTF surged and the four annual delivery products slid into backwardation – a phenomenon which lasted about a month and was largely attributed to LNG hedging by market participants at the time.

New US LNG volumes – which are linked to gas hub prices and will often be destination free – could also disrupt the traditional relationship between oil and gas prices in Europe, Massimo Di Odoardo, principal analyst at Wood Mackenzie said.

Oil link

The correlation between oil and curve contracts at European hubs hit a peak in 2015 and early 2016 as crude prices slumped to historic lows, but Di Odoardo said that gas prices potentially following oil prices higher would be “hard to justify” based on the fundamental outlook.

Olly Spinks saw this potential dynamic posing a problem to some mid-stream companies. “There’s a suggestion that oil prices could recover quicker than gas prices … so a lot of long-term [oil-linked] contracts could get pulled up and there could potentially be a bit more pain for utilities having to manage the mismatch between their exposure to oil and gas prices,” he said.

Since midstream companies use Europe’s traded hubs to reduce the risk that arises between managing purchases linked to oil and sales linked to gas, diverging oil and gas prices may therefore be another driver of increased liquidity at the NBP and TTF in the years to come.

Spinks noted the potential for another knock-on effect of US LNG on European market dynamics as well, assuming physical volumes do reach the continent.

“Because US LNG is so flexible, we can see a lot of possibilities for less stable physical flows within Europe and that has the potential to erode or challenge some existing basis relationships … will PSV always be at a premium to TTF for example,” he said. Due to vast unused capacity and liquid hubs, Europe is widely considered to be a market of last resort for destination-free cargoes. jake.horslen@icis.com

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