A record rise in natural gas prices in Europe does not mean that it has become lucrative to send all available molecules to the region.
Even though European prices have more than tripled this year, they have yet to exceed the prices of liquefied fuel delivered to Asia, the largest importing region. This is because countries from Japan to India are panicking buying ahead of winter, intensifying competition for the small fraction of the supply that is freely traded in the spot market and is not tied. to long-term contracts.
Gas markets in Europe, Asia and the United States are linked by the LNG trade, so movements in one region could redirect flows. As the world’s largest traders and producers gather in Dubai for the Gastech conference – the first major in-person event for the industry since the onset of the coronavirus pandemic – LNG purchases will be a key topic of discussion as nations are looking to keep the lights on and people are getting warmer this winter.
Here are five charts explaining why Europe did not get enough LNG and what it will take to reverse the trend.
1. Where is the LNG?
Europe went from surplus to shortage in just two years. This is because of the surge in demand in Asia, as China quickly emerged from the global pandemic. The worst drought in a decade in Brazil also worsened the deficit, as the country turned to LNG to generate electricity normally generated by hydroelectric dams. All of this left very few cargoes for Europe, with imports plummeting since early June.
2. Long-term contracts
Most of the LNG is stuck in long-term contracts and the majority is destined for Asia. Thus, traders must play with less than half of the total supply. These contracts are usually linked to crude oil, which is currently cheaper than gas prices at European hubs or LNG in Asia. This means that countries are likely to stick to their contracts, leaving less cash for the spot market.
âLong-term contract volumes are in the money and you will definitely bring that cargo,â said Ciaran Roe, global director of LNG at S&P Global Platts.
3. Watch out for the gap
The first step in determining who wins the cargo battle is to observe the price differential in Europe and Asia. In the financial world, this means monitoring the spread between futures contracts traded in the Netherlands and the Japan-Korea marker, the spot price in Northeast Asia.
âIf you have a cash cargo, you’ll deliver it to where you see the best bottom line,â said Stacey Morris, research director at Dallas-based index provider Alerian. âIt’s going to be very competitive. “
4. Beyond the spread
But it’s not just about the spread. What really matters is the cost of the cargo when it actually lands in Europe. Right now, the 16-cent premium on futures makes LNG purchases unlikely.
âUnless that changes, you won’t have a lot of spot LNG in Europe,â Roe said.
5. Shipping costs
The best market for LNG is also determined by the cost of getting a cargo to Europe or Asia. For example, if LNG freight rates are high, the Atlantic LNG is more likely to stay in the region rather than making longer trips to Asia, Roe said.
To avoid last winter’s ship shortage and the unprecedented costs of getting an oil tanker on site, traders booked ships earlier this year.
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