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European gas prices exceed Asian spot LNG, shuts arbitrage

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European gas prices exceed Asian spot LNG, shuts arbitrage
National Grid's liquified natural gas (LNG) plant is seen at the Isle of Grain in southern England August 16, 2013. REUTERS/Paul Hackett/Files   -   Copyright  Paul Hackett(Reuters)
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By Sabina Zawadzki

LONDON (Reuters) – European gas hub prices have risen above the price of liquefied natural gas (LNG) on the Asian spot market in a rare occurrence that largely rules out arbitrage of LNG cargoes from the Atlantic to the Pacific basins.

Dutch and British month-ahead gas prices exceeded Asian spot LNG in April for the first time in four years. Asian LNG prices tend to be higher due to the huge demand there with few alternative supplies.

The switch in the price values is another twist in a unique year for the fast-expanding commodity as soaring production from new plants, much of it in the U.S. Gulf Coast, coincides with tepid demand from Asia, normally consumer of 75% of global LNG.

Month-ahead Dutch gas <TRNLTTFMc1> was $4.56 per million British thermal units (mmBtu) and the British equivalent <TRGBNBPMc1> was $4.48 per mmBtu by 1315 GMT on Monday, while Asian spot LNG for August was heard at $4.40 per mmBtu <LNG-AS>.

(Graphic: European gas hub prices exceed Asian LNGLNG-TTF spreads, https://tmsnrt.rs/2NYliQS)

The arbitrage, whereby Atlantic Basin LNG – including from the U.S., Russia and West Africa – headed for Europe instead travels the longer distance to Asia to fetch a higher price, has been largely closed for most of the year. That is because the spread has rarely exceeded the extra cost of shipping – broadly defined as a dollar per mmBtu.

Forward price curves moreover indicate the situation is unlikely to change until at least October.

When the Japan/Korea Marker (JKM) for the months of August, September and October is compared to the Dutch Title Transfer Facility (TTF) forward prices, the spread is below $1 per mmBtu. For October, it is 46 cents and was as low as 28 cents.

The JKM is a benchmark published by commodity pricing agency S&P Global Platts and Asia’s main LNG pricing benchmark for the spot market.

(Graphic: Henry Hub to Europe recovers but JKM to Europe looks low, https://tmsnrt.rs/2jUkChm

Dutch and British month-ahead gas prices soared this month in part due to a string of planned outages in Norway, although their 38% to 44% gains in the past two weeks have not fully reversed the prolonged 66% percent fall since last October.

The rise has, nevertheless, given a breather to European suppliers that had contracted to buy U.S. LNG by widening the spread with the U.S. Henry Hub gas price <NGc1>. At one point last month the spread did not cover shipping costs.

With U.S. production the largest source of increased supply in the past year, Europe’s ability to absorb excess LNG is being tested. Europe has long been seen as the industry’s “destination of last resort” due to its flexible continent-wide markets.

(Graphic: European hub, Brent crude oil and Asian spot LNG prices, https://tmsnrt.rs/2jVflpN)

(Reporting by Sabina Zawadzki; Editing by Kirsten Donovan)

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