Bullish European LNG prices pose challenges for arbitrage to Asia

LNG arbitrage to Asia has become increasingly challenging as European prices continue to stay bullish, though muted demand in Europe is keeping US volumes pointing toward Asia.

"TTF has strengthened a lot recently and sellers are struggling to find buyers at elevated prices in Asia," said David Lewis, LNG analyst at S&P Global Commodity Insights.

Recent assessments by Platts, part of Commodity Insights, indicate a narrowing arbitrage for North Asia via the Cape of Good Hope route as well as the most economic route of the Panama Canal.

The discount for the Cape of Good Hope route has widened to 65.3 cents/MMBtu and the Panama Canal route stands at a mere 16.1 cents/MMBtu premium Aug. 8 for US cargoes heading to North Asia versus Atlantic.

These are the weakest arbitrage levels seen for North Asia in two months. The levels were last seen weaker June 3 when the Cape of Good Hope route stood at a 69.4 cents/MMBtu discount and Panama stood at a 12 cents/MMBtu premium, Platts data from Commodity Insights showed.

Similarly, the arbitrage for South Asia has also been dwindling. Cargoes coming via the Cape of Good Hope showed a discount of 74.2 cents/MMBtu, the weakest since April 18, when the said levels were at a 74.8 cents/MMBtu discount.

While the arbitrage seems to be tipping in favor of Europe, cargoes are still increasingly heading to Asia where demand remains strong, while Europe has been seeing low buying interest amid intensified volatility and healthy gas storage.

In July this year, Asia accounted for 43% of flexible US LNG exports, up from 32% at the same time last year. In contrast, Europe's share dropped from 51% in July last year to 31% this year.

The trend of Europe's declining share has been going on since the start of 2024. Each month in 2024 has seen a year-on-year decline. Europe's share has also been on a consistent fall month-on-month since March. In fact, Europe's share in July has been the lowest since September 2021, before the commencement of the Russia-Ukraine war.

Europe's price rise outpaces Asia's

European LNG and gas prices have surged, reacting swiftly to global supply-side concerns, which have pushed up prices in the Atlantic more than in Asia.

Platts assessed the DES JKM and DES Northwest Europe markers for September delivery at $13.597/MMBtu and $12.676/MMBtu, respectively, Aug. 8, Commodity Insights data showed.

The prices for European LNG have risen by around 24% since July 25. In comparison, JKM prices have only ascended by 12% in the same period.

The bullishness in European LNG and gas prices is fueled by anxiousness around winter supply security, market participants said.

The ongoing geopolitical concerns, including tensions between Israel and Iran and the Russia-Ukraine conflict around the Sudzha interconnection point, have added considerable upside risk to prices as any escalation in any of these hostilities can have a major impact on supply infrastructure and shipping for the coming months. This could push the currently calm Europe to a state of frenzy, especially when winter demand kicks in.

There is an added risk of unplanned maintenance. Recent weeks saw unplanned maintenances at Bintulu, Ichthys, a few Norwegian facilities and even Freeport. Planned maintenances are also scheduled for September, which if extended, can have a detrimental impact on Europe's winter supply, market participants added.

Demand in Europe remains subdued

Despite the risks associated with winter supply, Europe's demand has been lackluster owing to healthy renewable supply and gas storage.

"Imports have dropped due to a combination of weak demand, robust Norwegian supplies and lower liquefaction utilization," Lewis said. "So, Europe needs less LNG at a time when there is less LNG globally. Storages are healthy, NCS production is at a five-year high in July and gas burn in the power sector is weak in NWE. At the same time, you have strong demand in Asia, so Europe has priced itself out of LNG."

EU gas storages were 87.26% full Aug. 10, according to Gas Infrastructure Europe data, down slightly from 88.42% seen at the same time last year.

European demand may pick up and utilize the arbitrage as the market approaches winter, though there are also chances of late heat waves in Asia, which could delay this timeline.

"I think you will see more cargoes coming to Europe from September/October onward," added Lewis. "The problem is whether the market expects a correction at some point. Asia is a safer bet when the arb is tight as you can hedge the full value of the cargo, which is harder to do in Europe as you are more exposed to DA pricing."