Interactive: US LNG margins to Europe developing as curve prices rise

The economics of shipping US LNG to Europe are becoming increasingly favourable as circumstances have conspired to push up forward gas prices in Europe.

On 22 June, the NBP Winter contract surged 8% session on session to $6.411/MMBtu on the back of news about a full and immediate 42-day restriction on injections into Britain’s biggest storage facility, Rough.

Based on forward prices on 22 June, the cost of gas for Winter ’16 delivery at the NBP would be big enough to cover not only the typical feedgas element of US LNG exports – 115% of the Henry Hub – but also the $2.25/MMBtu liquefaction tolling fee written into the first contractual offtake agreement between Cheniere and Shell, and the cost of shipping to Europe. Find the blue bubble representing this development in the visualisation below.

The spread between forward gas prices at the Henry Hub and in Europe only serves as a guide to the profitability of future exports, as contractual cargoes lifted from Sabine Pass are linked to the Henry Hub settlement price for the month in which the cargo’s delivery window is scheduled to begin.

The chances of seeing US LNG cargoes arriving in northwest Europe even sooner have also increased.

The ICIS free-on-board (FOB) price assessment for the US Gulf has frequently slipped below the NBP front month since it was launched in May. The NBP front month is yet to pull clear of the ICIS US FOB price when shipping costs are factored in, however.

The FOB price is formed from direct input from market participants, and in the absence of firm transactions, bids and offers are considered. Until more liquidity develops, the US FOB price assessment also includes a netback element from the highest spot delivered ex-ship (DES) price in the Atlantic Basin.

Key contracts on the TTF curve have also climbed in recent sessions, but remain at a discount to the NBP and are therefore moving into ‘into-the-money’ territory at a slower pace.

On the front month, the TTF did hold a bigger premium to the ICIS US FOB assessment on 22 June than the NBP. The Rough storage outage has cut injections of gas in Britain creating a short-term surplus of gas that has applied pressure to the prompt and front-month contracts at the NBP in particular.

The decision to flow US LNG towards Europe is not solely dependent on favourable profit margins to northwest European hubs, but also on how competitive European hubs are versus other global LNG import destinations. At present, destinations such as Bahia Blanca in Argentina and Hazira in India still offer US exporters a better return.

European hub prices are likely to remain volatile in the short term as the market digests the implications of the recently confirmed Brexit and awaits news regarding future Groningen production caps. The arbitrage for US LNG exports to Europe may be set for further swings in the coming sessions. jake.horslen@icis.com