Europe a global gas price signal, but US influence set to rise
European natural gas hubs are currently providing the “marginal price signal for the global market”, but the US Henry Hub is likely to become increasingly influential in the future, delegates at the Flame gas conference in the Netherlands have said.
Olly Spinks, director at consultancy Timera Energy, said the relatively low volume of US LNG that has so far been delivered to Europe was not an indication of the continent’s lack of relevance in the global market.
“Although the physical cargoes dispatched out of the US don’t necessarily end up in Europe, the decision around how to price those cargoes are coming from European hub signals,” he said.
European hubs are also a key factor determining how portfolio players – which account for a large share of US liquefaction capacity – make decisions about how to “exercise optionality” of their contracts, he added.
With regards to Asia, Spinks also said European hubs were providing a floor to Asian gas prices with periods of greater convergence – as has been the case in recent weeks – likely to be a good indicator of global LNG oversupply that should be monitored by market participants.
As US production capacity continues to build, however, Spinks said he expected the Henry Hub to become increasingly influential on global gas pricing.
“The spread [between the Henry Hub and Europe] could come down a lot in terms of the true variable cost of getting gas out of the US to Europe, compared to what is currently observed in forward pricing,” he said. “Over the longer term, when you get that convergence the Henry Hub is going to be the predominant driving force for global pricing.”
Based on ICIS price assessments and NYMEX closing futures on 8 May, the TTF premium to the Henry Hub ranged between $1.67-2.67/MMbtu for delivery periods between Q3 ’17 and Q4 ’19.
On the sidelines of the conference, one head of trading at a major European energy market participant, but with only a small physical LNG position, said his company was now actively managing spread positions between the Henry Hub and the major European markets “up to about a year ahead on the forward curve”.
He said that he expected many of Europe’s other big energy trading firms to be doing the same, either to hedge physical positions or to speculate on the development of the spread.
David Maerz, head of global trading analytics at oil major BP, also said he expects the Henry Hub to become an increasingly significant global price driver, with the US on the verge of becoming a net exporter of gas in the short-term and likely to become the leading supplier to the global market in the next 10-15 years.
One possible implication that Maerz highlighted was global gas prices’ increased exposure to the seasonality of the US domestic market.
“The North American market is very seasonal and is about twice the size of the European market and about two-and-a-half times the size of the global LNG market, so a cold winter in North America is going to have a very material impact on global LNG prices in that year,” he said.
Other delegates at Flame said the reduced influence of oil prices over the European spot gas market could be another implication of rising US LNG supply and greater Henry Hub influence, particularly if oil prices recover and the market rebalances while the gas sector is still grappling with potential LNG oversupply.
Timera’s Spinks also believed the influence of oil on European gas prices could wane, but highlighted new “cap and collar” pricing structures within oil-indexed supply contracts as a key factor for this.
Following renegotiation, some Russian oil-indexed supply contracts now include an element of hub-indexation which prevents contractual prices from deviating above or below prices at key European hubs, according to predefined thresholds. firstname.lastname@example.org
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