East-West LNG arbitrage opens up amid depressed global freight rates

Weak shipping rates across the global LNG market have helped widen US arbitrage opportunities to Asia despite narrow cross-basin spreads and relatively depressed demand, sources said.

Platts assessed the DES Northwest European marker for December at $12.543/MMBtu on Nov. 6, down 1.3% on the day, according to S&P Global Commodity Insights data. At the same time, Platts assessed the JKM -- the benchmark price for delivering cargoes into Northeast Asia -- at $12.982/MMBtu, down 2.5%.

The NWE-JKM spread tightened to 38.5 cents/MMBtu, the narrowest since 36.4 cents/MMBtu on Oct. 10 and compared to $2.301/MMBtu seen a year ago.

In the swaps market, the JKM/NWE derivative spread throughout the 11-month curve remained under the $1/MMBtu mark.

Despite the narrow spreads between NWE and Asia, opportunities to divert US-sourced cargoes into the Pacific basin strengthened.

East-West arbitrage is marginally open now, with Platts assessing the LNG East-West arbitrage (via the Cape of Good Hope) at minus 44.5 cents/MMBtu on Nov. 6, up 16.7 cents on the day to be the strongest since 34.5 cents/MMBtu on Sept. 23.

Subdued global freights

The main factors supporting US arbitrage were weak freights coupled with relatively steady spreads between the Europe and JKM price, sources said.

Platts, part of Commodity Insights, assessed the US Gulf Coast LNG freight rate to NWE at 63 cents/MMBtu on Nov. 6, down from $1.800/MMBtu seen a year ago.

The US Gulf Coast freight rate to Japan/South Korea round the Cape of Good Hope was assessed at $1.92/MMBtu, down from $5.89/MMBtu a year ago.

Many players have taken long positions in the shipping market due to the sharp rise in prices seen in the freight market a few years ago.

Traders attributed weak freight rates to the additional supply of LNG ships in the market and ongoing LNG export project delays in the US.

Although demand has remained relatively weak across both the Atlantic and Pacific basins, these softer rates have helped support US FOB cargo exports.

US LNG exports stood at 7.93 million mt, or 109 cargoes, in October, according to Commodity Insights data. That compared to 7.58 million mt, or 108 cargoes, in September and 8.02 million mt, or 118 cargoes, in October 2023, the data showed.

Of the October total, 41% went to Europe and 18% to Asia compared with 43% to Europe and 38% to Asia in September.

Narrow floating economics

The market remained relatively weak ahead of an expected uptick in demand at the end of the year and into early 2025, sources said. European gas inventories stood at 94.75% full, according to Aggregated Gas Storage Inventory data.

At the same time, traders pointed to healthy gas storages across China, Japan and South Korea, with healthy supply of renewables also satiating appetite for LNG cargoes.

However, gas inventories across Europe remained below the 99.50% level seen this time last year, with Europe already seeing spells of net withdrawals. A narrow contango has also deterred any storage or floating incentive.

Platts assessed the NWE LNG December derivate in a 7.7-cent/MMBtu contango to the January derivate on Nov. 6, narrower than the 48.6 cents/MMBtu seen this time last year.

As a result, the number of floating ships and volume on water has receded. The number of floating storage LNG ships stood at 21 on Nov. 7, Commodity Insights data showed. That was lower than the last peak of 25 ships on Oct. 30 and compared to a peak of 37 ships floating on Oct. 25, 2023.

Although cheaper shipping rates have helped support FOB deliveries, traders see the lack of floating storage incentive tightening the market for the latter half of winter when demand is expected to increase.

Given the likely expiry of the Russia-Ukraine transit agreement, Europe will need at least an additional 10 cargoes per month of demand to replenish the lost 15 Bcm/day of gas.

Additionally, sellers have been withholding their offers for December to sell into an expected tender from Egypt for first-quarter 2025. Further adding to demand, Brazil is to procure around five cargoes per month for Q1, and there will be seasonal demand from Asia in January, sources said.