European gas, LNG flips to premium over JKM on supply shortage risks

Northwest European LNG prices flipped to premium territory versus Northeast Asian benchmarks for the first time this year as European worries over supply shortages bolster sentiment.

Platts, part of S&P Global Commodity Insights, assessed the JKM -- the benchmark price reflecting LNG delivered to Northeast Asia -- for December at $13.821/MMBtu on Nov. 14, up 31.4 cents/MMBtu or 2.3% day on day.

At the same time, the Northwest European LNG marker for December was assessed at $14.058/MMBtu, up 70.6 cents/MMBtu or 5.29% on the day.

This put the JKM at a 23.7-cent/MMBtu discount to NWE, the weakest spread between the two LNG markers since Oct. 12, 2023. This also compared to the $1.615/MMBtu premium JKM held over NWE this time last year.

The JKM-TTF spread also fell into discount territory, with Platts assessing the spread between Asian LNG and the Dutch TTF gas hub price at minus 27 cents/MMBtu. This was the weakest the Asian market has been versus European natural gas since the end of August in 2023.

Bearish fundamentals in the Pacific region were being countered by bullish spells of supply side risks across the European market. Expectations of tighter supply over winter acted as a catalyst to spark higher in Northwest European. The last few days in Europe have seen multiple bullish factors mounting concerns about supply tightness.

Austria's OMV warned of potential Russian gas deliveries Nov. 13, as it looks to recover compensation awarded by an arbitration court. This could lead to a loss of around 5 TWh/month of Russian volumes for Austria, basis the import levels seen in the past year.

As the market nears the expiration of the Russia-Ukraine gas transit deal at the end of 2024, without another agreement clear, concerns are mounting.

"The possibility of halt of Russian supply in the coming months is bothering the traders," a Middle East-based trader said.

Adding onto the expectations of stronger LNG and gas demand was Germany's economy ministry instructing state-owned LNG terminal operator Deutsche Energy Terminal (DET) to reject any cargoes of Russian LNG that may attempt delivery.

Growing supply concerns

Dropping temperatures in Europe are expected to incentivize buying, however, sellers are still targeting to offer into Q1 2025 in anticipation of better prices, on account of increased demand from competing regions. This has further tightened the supply in the market.

"[LNG activity in Europe] is still muted," a Mediterranean-based trader said. "Gas price is strong, but DES LNG is expensive. I think sellers are waiting for Egyptian tender."

"The supply side of market is focused on Q1 because there are lot of upside potential for prices to go as European LNG demand is expected to grow as Russian supply is halved and there is reasonable possibility to have colder than normal weather in Europe or Asia," said Alija Bajramovic, senior research analyst for European and Russian LNG with Commodity Insights. "Or even the perfect storm -- having simultaneously low temperatures in Europe and Northeast Asia, which would send prices roaring."

The gas storages are also depleting at a faster pace compared to last year. In an event of cold winters, the current withdrawal pace could leave the inventories in a poor state.

"It seems that demand part of European market is realizing that storage situation could soon stop being comfortable as inventories are being depleted at much higher rate than last year and key markets like the Netherlands have their storage fill already in low 80s," Bajramovic added.

European gas inventories were 92.58% full, according to the latest Aggregated Gas Storage data as of Nov. 12, compared with 99.37% a year ago.

The rate of withdrawals has averaged 0.039% so far this winter, contrasting with the 0.09% injections rate in the same period last year.

Over the week, European gas storage fell 2.16% from Nov. 5 to Nov. 12 versus last year's fall of 0.13% over the same period.

Europe takes poll position for US cargoes

The flipping on spreads have evidently closed the arbitrage East, with cargoes expected to now face Europe with immediate effect.

"If this discount for Asia sustains, most open origin cargoes will go to Europe, which is good. Their inventory will be better than otherwise," an LNG trader said. "I don't see very strong demand from China. They have inventory and they have been offering. They were earlier buying for January. I don't think there is a lot of demand in the market in Northeast Asia."

Although the arbitrage east has been uneconomical since late September, Europe has not particularly received an influx of cargoes as would be expected, owing to the low shipping costs.

Some traders even argued European prices would need to rally higher to attract volumes back to the Atlantic Basin given that shipping is currently being seen as a sunk cost.

"As you could sell cargo to Europe below TTF and if people sunk shipping fully, JKM/TFU need to match this price gap to reflect the same netback for cargo DES Asia or Europe," an Atlantic-based trader said.

Traders expect Europe to remain as the premium destination versus Asia heading into the latter half of winter, as the region begins to attract more volumes to satiate winter demand.