East-West arb window closed, Europe regains competitiveness on attracting LNG cargoes

Weaker arbitrage opportunities for LNG have emerged due to a narrowed price spread between the Asian and European markets, prompting some cargoes originally destined for Asia to redirect towards Europe.

Platts, part of S&P Global Commodity Insights, assessed the DES Northwest European marker for November at $12.851/MMBtu on Oct. 7, down around 0.12% on the day. At the same time, Platts assessed the JKM -- the benchmark price for delivering cargoes into Northeast Asia -- at $13.225/MMBtu. The NWE-JKM spread tightened to 37.4 cents/MMBtu, significantly narrower than the $1.76/MMBtu spread observed on Oct. 7, 2023. This reduced spread has led to an increase in vessels redirecting to Europe.

In the swaps market, the JKM/NWE derivative spread for the front month stood at 55 cents/MMBtu, marking the lowest level since March 6, when it was assessed at 52 cents/MMBtu.

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In the paper market, the JKM/TTF spread for December 2024, January 2025, and February 2025 has remained below $1/MMBtu for several trading days, indicating a lack of arbitrage opportunities to Asia for the upcoming winter.

Market sources said the tightening JKM/TTF spread is linked to tensions in the Middle East, which have kept European gas prices elevated despite no supply disruptions.

More cargoes diverted from Asia to Europe

Market sources also agreed that the current arbitrage could prompt cargo diversions.

The LNG carrier Bw Brussels made a V-turn outside the northeast Brazil after being loaded in Freeport, likely to supply into Europe rather than heading to Asia via the Cape of Good Hope, data from S&P Global Commodities at Sea showed Oct. 8.

Another LNG carrier, LNG Endeavour, originally bound for the JKM market, is now also heading north towards Europe.

Similar diversions were noted earlier this month with two other carriers, the Marvel Dove and the Vivit Arabia LNG.

Opportunities to divert US-sourced cargoes into the Pacific basin weakened further. Platts assessed LNG East-West arbitrage (via the Cape of Good Hope) at minus 83 cents/MMBtu Oct. 4, down 3.7 cents/MMBtu on the day and 16 cents/MMBtu lower week on week.

“This is a shoulder period for Asia,” an Atlantic-based LNG trader said.

Arbitrage opportunities remain thin in the Pacific basin. Historically, this time of year would see players floating cargoes to sell later in the winter months. However, given the relatively thin contango in both the Atlantic and Pacific basins, traders have been optimizing their volumes and taking their cargoes towards Europe given the price rally due to escalating tensions in the Middle East.

“[There is] less pressure from Asia really -- they're not in a rush to buy... There are buyers but they are not rushing to buy cargoes, and after Golden week, China can buy but they are not racing to do it,” an LNG trader said. “Asian buyers are not really buying, and there aren't many cargoes in Europe, so they're paying up to attract them.”

Another trader said: “Right now it's impossible to move a cargo from the Atlantic to the Pacific.”

Geopolitical tensions boost European demand

The escalation of tensions in the Middle East, particularly fears surrounding potential disruptions to Iranian oil and Israeli gas supplies, significantly influenced market sentiment in Europe.

Although Israeli gas infrastructure, such as Chevron’s Tamar and Leviathan fields, resumed production after brief shutdowns, the market remains cautious about further escalations in the region. These developments had a spillover effect on European gas and LNG markets, contributing to the price increases.

Although the escalations would also likely affect Asian prices, the shoulder season in Asia is currently cushioning such price gains.

The European region is also having to compete with places like Egypt, Bulgaria and Latin America for cargoes, thereby encouraging players to keep the cargoes in the Atlantic basin.

Adding to the bullish outlook for Europe are colder-than-expected temperatures, which triggered the region’s first net gas withdrawals since April, a full month earlier than last year. This early onset of winter has increased demand for LNG as Europe prepares for the heating season. European storage levels fell by 0.04% on Oct. 2, indicating the start of withdrawals across several countries. However, the region is back to net injections since, according to the latest Aggregated Gas Storage Inventory data.

Weak freight rates prompt arb opportunities

Although vessels are slowly making their way back to Europe, cheap freight rates have helped to keep some arbitrage opportunities slightly open.

This has helped some players who consider shipping a sunk cost to take cargoes towards the Pacific basin. Although the contango across both the Atlantic and Pacific remains narrow, some players have been taking their volumes towards Asia, with traders seeing fleet speeds relatively low. They see this as an artificial way to float cargoes. with volumes taking the longer voyage around the Cape of Good Hope and sailing at lower speeds.

Platts assessed the US Gulf Coast LNG freight rate to Northwest Europe at 87 cents/MMBtu on Oct. 7 from $1.693/MMBtu seen a year ago.

The US Gulf Coast freight rate to Japan/Korea round the Cape of Good Hope was assessed at $2.69/MMBtu, down from $5.45/MMBtu a year ago.

LNG volumes on the water reached a 10-month high of 19.6 million mt as of Oct. 3, according to Commodity Insights data.

The average fleet speed so far in October decreased slightly from 11.87 to 11.78 nautical mph, which could imply that more cargoes had been floating or sailing at lower speeds.