GLM Comment: Brexit’s currency impact on LNG

On 24 June Europe awoke to the news that Britain had voted to leave the European Union, destroying market confidence and the value of the sterling against the dollar in one blow.

In the short term, the weakness of the European currencies against the global currency of LNG – the dollar – will increase the currency risk of some global LNG trades.

In the long term, a European or even global market weakness could hit investor confidence more than the falling oil price in 2014 already has. LNG, with its numerous unfinished projects worldwide will be particularly affected as a market.

Brexit’s immediate impact on LNG is currency-related.

The sterling’s fall against the dollar pulled down the price of the NBP’s August ‘16 contract in dollar-denominated terms on Friday 23 June, even though the contract was stable in sterling.

Just as a bullish NBP has raised global spot LNG prices in recent weeks, a bearish NBP could also pull them back down.

Any ongoing weakness of the sterling and euro against the dollar as a result of the 23 June European referendum will make LNG a very expensive purchase for Europe going forward. This raises question marks over whether US volumes will still head to Europe, and whether European buyers will be willing to receive them.

According to French energy company ENGIE, Europe was well-placed to absorb more than half of the 70mtpa nameplate capacity of LNG coming online from the US from 2017. These comments were made at the Flame 2016 conference in Amsterdam in May, ahead of Brexit.

To a certain extent they still ring true. Europe’s other alternative fuels such as coal are also priced off the dollar so have become equally expensive overnight.

If the fuel-switching dynamic does not change – and coal is not a volatile commodity, so this is unlikely – then Europe will still buy LNG for its power generation.

However, some sellers of LNG will face currency risk, particularly if they are marketing their LNG as destination-free.

Companies with offtake of US LNG will lift the cargoes on a free-on-board (FOB) basis, meaning that their LNG could be indexed to the TTF hub but could also instead send the cargo elsewhere such as India.

In these cases, the sellers take the currency risk of indexation to the TTF but without selling direct into these markets, they are unable to hedge. Currency risk is magnified.

In contrast, those selling into Europe can hedge any euro or sterling weakness off the NBP or TTF hub, limiting the currency risk and perhaps incentivising sales into Europe.

Persistent weakness at the NBP and, if the euro tracks sterling, the TTF hub, will affect where future LNG contracts are benchmarked.

Perhaps pricing future LNG contracts off the pence-per-therm NBP will become less attractive than pricing off the euro-per-megawatt hour TTF. At present, LNG lacks a solid pricing benchmark so the choices will depend on how the different currencies perform.

Lastly, Brexit might have put the global economy at risk of recession. If this happens, LNG projects already delayed will face longer lead times. This relatively-young industry is particularly reliant on infrastructure getting financed and capacity coming online, meaning it could be adversely affected by this crisis. josie.shillito@icis.com