Improving arbitrage to Asia sparks higher Med LNG prices

Improving arbitrage opportunities to Asia have pushed up LNG prices in the Mediterranean with buyers in the East of the region looking to attract additional cargoes while West Med players seek to redirect cargoes to Asia.

Although cyclone disruptions in Australia, as well as unplanned maintenance in Norway and lower LNG deliveries to Europe have heightened market sentiment, leading to volatile flat prices, the market remains fundamentally weak with supply outpacing demand, analysts said.

The widening arbitrage to Asia saw some new opportunities open up in the week started March 18, traders said. Shipping sources saw some spot requirements in the East Med push up activity and open the door for players with capacity in the Atlantic.

Arbitrage opportunities surface

Although in recent weeks cargoes have been trading within their respective basins, traders are seeing further opportunities for Mediterranean LNG volumes to head to Asia.

"There are some counterparties selling cargoes elsewhere so that is pushing up the PVB [Spanish gas price benchmark]. [It's] not Spain really taking in more LNG, but they are selling to other markets like the Far East and India," an LNG trader said. "It is more so they are diverting cargoes then backfilling with the gas -- that is why PVB is up."

Platts, part of S&P Global Commodity Insights, assessed the marker for the West Med region at $8.479/MMBtu, the highest since Feb. 5 and now at parity to its Northwest European equivalent.

For a very prompt cargo loading from the US Gulf Coast -- when considering freight differences and a first-half-of-May delivery date to Asia amid longer shipping times round the Cape of Good Hope -- delivery to the Japan-South Korea-Taiwan-China hub would command a discount of about 35.3 cents/MMBtu against selling into the West Med in the second half of April, according to S&P Global data.

Arbitrage economics through the Suez Canal commanded a discount of 47.3 cents/MMBtu for selling into Asia over the West Med, while through the Panama Canal it commanded a premium of 24.7 cents/MMBtu.

Although US economics have been worn away by global shipping constraints, traders said current economics were strong enough to incentivize sellers in the Med to take their cargoes to India and elsewhere in Asia where netbacks are stronger.

Shipping sources said these dynamics had led to more vessels moving away from the Atlantic and to the Pacific Basin. The number of available spot vessels in the Atlantic has dropped to its lowest level since around December last year, while the number of available vessels in the Pacific has begun to pick up slightly on the week after it slumped to a month low.

"It's possible that some shippers are diverting their cargoes to Asia [with the current PVB/TTF prices] and need to close their positions on Q2 2024 and Q3 2024," a Switzerland-based trader said, adding that the current European market remained well-supplied with gas and that LNG sendouts to Europe were "only a surplus."

"With the huge amount of [LNG] storage capacity that the Spanish market offers, a lot of market players keep their LNG in the [TVB] tanks to easily redivert them to Asia if prices are more competitive there" another Spain-based TVB broker added. TVB is the price reflecting LNG in tanks before it's regasified

LNG stored in Spanish tanks were 60% full March 20 compared with 58% at the beginning of the month, Spanish gas transmission system operator Enagas showed.

East Med appetite

Although prices have weakened in Asia recently, traders still see favorable economics in the region drawing in additional supply from the Atlantic. As a result, this has intensified price competition with Europe and the Med. The ongoing shipping constraints in the Red Sea have been continuing to push Italian and East Mediterranean buyers to bid higher to attract supplementary volumes from elsewhere.

"[I'm] hearing Italy is the strongest market in Europe for LNG now," another LNG trader said.

The strength in prices in the region is also due to the eight-month maintenance at the OLT terminal, which is leaving market participants looking for alternative sources for gas. The situation could also have been made dire by the longer voyage times that Qatari cargoes need to take around the Cape to deliver into Italy.

"It's always a premium market, but it's more premium, than expected," said a Med-based LNG trader. "I mean this will continue until the terminal will come back."

However, several traders added that despite the recent strength in Italy and the East Med to attract additional supply, Turkish buyers have been quiet given the recent high prices. Typically, buyers in the Turkish market are willing to pay higher premiums to ensure supply security.

While buyers in Italy and Turkey were still heard to be buying LNG volumes around parity to the European benchmark TTF gas price, with milder temperatures across Europe and the Med, and players heading into the injection season with ample inventories, traders expect that demand in the East Med may begin to dwindle into April and May.

LNG imports in March into the East Med – Turkey, Greece and Croatia – stand at 830,000 mt as of March 21. This was already 49% of levels from February, according to data from S&P Global.

Although some inbound volumes are expected into the region, March is still expected to be weaker than February imports.

Platts assessed the East Mediterranean Marker for May LNG at $8.754/MMBtu, a 27.5 cents/MMBtu premium to the Northwest European LNG market. The premium to NWE was the highest recorded by Platts.