TTF-Asian gas prices to remain closely correlated in 2020

Author: Arun Toora


• European-Asian gas link strengthens in 2019

• LNG contract indexation to TTF increases

• New Atlantic supply to taper off in 2021

LONDON (ICIS)--Price correlations between European and Asian gas spot markets have strengthened in 2019 and will remain tightly linked into 2020 as the role of the Dutch TTF as a global gas benchmark gains further traction.

Supply ramp-up from new global projects will taper off in 2021 and therefore the correlation between the two will likely weaken from then.

Active LNG players are increasingly looking at the TTF as it is used by global portfolio players as a hedging venue to optimise their positions and protect against price risk.

LNG Edge data shows that European offtake of LNG has soared in 2019, shattering previous years.

This represents a huge shift in import dynamics. Asia had accounted for around 84% of LNG supply from the past five years, whereas Europe itself has soaked up around 68% of incremental supply in the year to date.

With Europe now a huge offtake region for LNG, gas markets globally have become increasingly linked to Europe’s most liquid gas hubs.


Analysis of price correlations between the East Asian Index (EAX) month +2 and the corresponding Dutch TTF contract showed that the relationship between the two strengthened throughout the year.

While Brent crude volatility has rocketed due to political warfare, US-China trade issues and weak demand forecasts, so its link to European gas and Asian LNG markets has fallen.

Throughout 2019 to-date, correlation coefficients between the commodities have been:

- TTF-Brent: -0.25

- Brent-EAX: -0.28

- TTF-EAX: 0.87

A correlation coefficient of 1 indicates perfect positive correlation and -1 perfect negative correlation, while 0 indicates no correlation between two datasets.

In September, European gas and power markets surged due to numerous supply shock announcements. The Asian spot price responded immediately to remain competitive with Europe.

“The link will continue with players actively hedging LNG against the TTF curve,” a European gas trader told ICIS.

However, the Asian price link with oil is not completely removed.

Drone strikes on 14 September, marked the largest ever single disruption to oil supplies, cutting 5.7m barrels (bbl)/day and sending bullish shockwaves through global oil markets.

Between 16-17 September when oil prices climbed 14% on the back of the attacks, Asian spot prices rose 2.3% while the TTF fell 6.3%.


This triple connection is driving the growth of hybrid contracts made up of deals structured around both Brent and TTF indexation.

State-owned company China National Offshore Oil (CNOOC) indicated it would use part Brent and TTF indexation in its 13-year 1.5mtpa deal from Mozambique, a source told ICIS earlier in the month.

The company will not index long-term contracts to the US Henry Hub, citing that the benchmark has little correlation with the global LNG market.

Although total traded volumes at the British NBP dropped 17% in gas-year 2018 compared to the previous gas year, liquidity is still robust across the curve for prospective buyers and sellers to hedge LNG volumes.

Japanese utility Tokyo Gas and UK-based utility Centrica secured long-term volumes from Mozambique LNG that are indexed to UK NBP and Brent crude.


Strong nuclear availability in Japan and Korea, an economic crunch in China and poor demand for LNG imports drove record low LNG spot prices in Asia.

The EAX front month was trading at $5.35/MMBtu on 13 November, whereas it was dealing at $10.20/MMBtu a year before.

Weak demand from the Asian Pacific means Europe has became a market of last resort with LNG dumped across the continent at record rates.

According to the IEA’s World Energy Outlook 2019 report, coal demand in China will only fall 0.4% per year up to 2040 due to 1000GW of high efficient coal-fired capacity being recently commissioned.

This could cause further diversion of cargoes into the Atlantic basin.

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