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ICIS Dutch TTF gas benchmark closes above EAX in bear market

By Patrick Sykes on 21-Mar-2019

The ICIS Dutch TTF gas benchmark closed above the East Asian Index (EAX) spot LNG price on 20 March for the first time in three years, inverting the usual relationship between the two and underlining the bearish mood that has gripped the spot LNG market since September.



The contract for May delivery on the Dutch gas hub traded as low as $4.938/MMBtu in the European session and closed at $5.095/MMBtu, $0.02/MMBtu above the EAX assessment published on 20 March for the same period.

“Right now I don’t see any signs that would change this picture,” one LNG buyer said.

“There’s definitely more volumes available than buyers, so we are being asked very frequently if we are buying something or not.”

The EAX has only fallen below the TTF twice before – in February 2015 for 18 sessions due to a slump in oil market and more briefly in April 2016 for two sessions.

The Dutch hub has historically provided a floor price for Asian spot LNG prices, with crude oil as the ceiling.

LNG prices have continued to fall over the past week despite outages at Qatar’s liquefaction trains, as the world’s leading LNG exporter has still been able to meet its contractual supply obligations and demand remains sluggish.

Asia, TTF convergence slumps on US LNG

The convergence of Asian LNG and European gas hub prices has also come closer to the calculated costs of producing US LNG.



Using a calculation of 115% of the US Henry Hub natural gas price on the NYMEX, which has become adopted in long-term tolling contracts on a free on board (FOB) basis from the US to roughly represent a variable cost, this cost, plus a $3.00/MMBtu fixed liquefaction fee as one way to illustrate the tolling models would mean that long-term marginal costs from the US have been out of the money since January 2019.

On a short-term marginal cost basis, the spread between the EAX and an implied US cost, considering 115% Henry Hub plus $1.00/MMBtu, has narrowed to less than $1.00/MMBtu since the EAX has fallen into the low $5.00s/MMBtu.

Traders questioned whether this would justify US LNG production rates to decrease. However, each project’s long-term offtaker, such as the offtakers from Sabine Pass alone, would have different comparisons for marginal costs.

Portfolio seller Shell, for example, would likely consider shipping as a sunk cost at a different figure than a trading house with no equity volumes.

Given that Cheniere’s two LNG plants at Sabine Pass and Corpus Christi are dedicated to long-term offtakers, it is not likely that the toller would opt to pay for the fixed liquefaction charge and not lift LNG on the basis of the spot price alone.

For Cove Point, where offtakers GAIL and Japanese trading house Sumitomo also have long-term tolling agreements but supply the gas themselves, it could be more feasible for Cove Point tollers to respond to price but would not likely be the case given that Sumitomo has long-term buyer commitments for its LNG from Cove Point.

GAIL, for its part, has run a series of sell and swap tenders seeking to exchange cargoes with trading houses to sell its Cove Point volumes on an FOB basis in exchange for deliveries into India, thereby avoiding the shipping differential.

Traders also have wondered whether there would be any demand elasticity, particularly in China, should the spot LNG price stay low.

Potentially buyers such as Brazil’s Petrobras could find the low spot prices attractive enough to procure LNG even if fundamentals do not align with immediate spot demand. Instead, there could be better economics in securing cheap and prompt LNG in comparison with other alternative fuels.


Article by Patrick Sykes and Ruth Liao and previously published in LNG Edge.