Asia faces steep competition against Europe for US LNG ahead of winter

As forecasts of lower temperatures begin to storm through the market, the battle for additional supply ahead of the start of heating season has remained one-sided as US LNG continues to find a home in Europe.

While the European and Asian LNG markets remain comfortably supplied to deal with any gradual increases in demand in the coming weeks, with lower temperatures forecast across both regions and the overall tight picture in the global market, the fight for additional spot volumes will be increasingly important this winter.

Once a cold snap hit the market, Asia and Europe will be battling it out to receive the extra LNG cargoes out of the US. Recent droughts at the Panama Canal as well as persistent milder temperature forecasts have subdued Asia's competitiveness for US LNG. However, with lower temperatures looming, the battle could intensify in the coming months as prices are supported by heating demand reigniting.

Platts, part of S&P Global Commodity Insights, assessed the December JKM -- the benchmark price reflecting LNG delivered to Northeast Asia -- at $15.691/MMBtu Nov. 14. Platts assessed H1 December at $15.390/MMBtu and H2 December at $15.991/MMBtu.

The Platts DES Northwest Europe Marker for December was assessed at $14.076/MMBtu on Nov. 14. Platts assessed first-half NWE December at $13.826/MMBtu and assessed second-half NWE December at $14.326/MMBtu.

Typically, this spread between Asia and Europe would drive any supplementary spot volumes out of the US towards Asia. However, given the current dynamics at the Panama Canal and unfavorable arbitrage economics, most volumes have swayed towards Europe.

For a very prompt cargo loading from the US Gulf Coast -- when considering freight differences and an H2 December delivery date to Asia amid longer shipping -- delivery to the Japan-South Korea-Taiwan-China hub would command a premium of around 9.5 cents/MMBtu over selling into Europe in H1 December.

This fell from 53.7 cents/MMBtu seen the previous day, after recovering from negative territory on Nov. 9 where it was seen at a 63.6 cents/MMBtu discount over selling to Europe.

Lacking competition

US LNG is in a prime place to flexibly respond to global differentials. While the netbacks between selling into Asia and Europe set the tone for where the US will sell into, ongoing market dynamics have been sparking volatility in arbitrage economics.

Although temperatures are forecast to cool in the US, Europe and Asia, Europea is expected to cool rapidly. Blips of heating demand were heard in Asia, however, without a rapid fall in temperatures. Asia's competitiveness for US tons could lag behind Europe.

Additionally, with the weaker-than-expected growth and demand signals from Asia, as well as the ongoing Panama Canal drought, any extra cargoes from the US have been heading to Europe. Additional costs in taking longer routes due to the delays at Panama Canal, have also depressed any extra US volumes flowing to Asia.

US LNG exports to Europe and Asia stand at 1.37 million mt so far in November, according to data from S&P Global. Of the total, the entirety was headed to Europe.

"The ongoing drought-driven constraints at the Panama Canal meant that any traders trying to send a spot LNG cargo to Asia would need to account for a much longer journey and more expensive freight cost," Ross Lynch, director of LNG at S&P Global, said. "We assume that most cargoes that continued to travel to Asia during this timeframe were likely owned by Asian utilities that were not optimizing supply and tanker capacity on spot price signals."

European appetite

Analysts at S&P Global expect the total supply of LNG to Europe to rise this month, as Asian demand is forecast to remain relatively subdued.

Although European gas storages remain well-stocked to combat demand in the near term. Should milder temperatures return, then inventories across Europe should end the year well supplied. With the US and Europe also remaining strongly stocked, if milder temperatures persist like last year, then the global LNG market should remain relatively comfortable.

While temperatures may be mild this week in Europe they are forecast to fall into next week. Sources suggest a cold spell last more than a few weeks could rapidly deplete volumes. As the season demand increase outpaces the replenishment of supply, Europe will have to price higher in order to attract more LNG. Heating demand is expected to slowly climb this month with expectations for demand from the residential and commercial sectors across Europe to rise.

European imports have already climbed 1.29 million mt since the start of the week, to reach 5.98 million mt, according to data from S&P Global. Sources suggest imports this month will climb past the multi-month high seen in October.

As demand begins to increase and the delays at the Panama Canal persist, logistics costs out of the US will rise. To keep the arbitrage open, US prices and freight will either have to fall or Europe and Asia will have to price higher to continue the flow of supplementary LNG volumes. The constraints at the Panama Canal will also help to support more LNG cargoes entering Europe, which will help to feed the brewing heating demand this winter.