April 29, 2019

LNG Volumes Flood into Europe on New Pricing Dynamic

Stratas Advisors

A rare price arbitrage opportunity has led to unusually high regasification activity across Northwestern Europe. For the first time in more than three years, the Northeast Asian spot price has dipped below the Dutch TTF marker, presenting a new dynamic.

For suppliers, the choice is obvious to sell spot cargoes into the higher margin markets of Europe. This is especially so for LNG suppliers West of Suez, who are able to reach Northwest Europe in a more economical way compared to Northeast Asia. Despite this new position of paying more for LNG than their Asian counterparts, European buyers are still in a favorable position, having experienced a decline in prices of over 30% since the beginning of 2019, and an even greater drop going back further into 2018.

This dynamic has led to a huge uptick in import volumes and regasification utilization across Northwest Europe. Two of three regas terminals in the UK (Isle of Grain and Dragon) have reached sendout levels in 2019 that have not been reached in more than three years.

Similarly, monthly import levels in other key markets in Northwest Europe have exploded since the fourth quarter of last year. The Netherlands, France, and Belgium have all seen huge import volume increases in the last 3-6 months as the new pricing environment has developed in their favor. Europe’s developed gas infrastructure, including its large regasification capacity and robust pipeline infrastructure, has long made it a dumping ground for LNG that has trouble finding a market.

TTF prices have resumed their historical position below Asian spot prices as of mid-April, but the arbitrage – at writing, less than $0.80/mmBtu, remains negligible. Indeed, prices in January diverged by more than $1.00/mmBtu for much of the month; despite this, import growth was already underway across the continent.

Being in the shoulder season of gas demand – that is, lacking extreme hot or cold weather across most of the world – these months are generally used as the season to replenish depleted stores in advance of moderate summer demand and as the beginning of the replenishment cycle for the high level of winter demand. But the large import volumes beginning in early 2019 have already increased stocks well beyond the expected historical pace. Storengy’s levels in France are more than four times what they were at this time last year, and nearly 40% higher than the average level seen during the same period from 2015-2017. In Belgium, Loenhout currently has about 2.5 times the average stocks of the comparative 2015-2017 averages, and has already reached levels that would historically be expected in the July-September range. While not as pronounced, several storage points in the Netherlands are at four-year highs for the season.

What this stands to mean for prices across the world is decidedly not good news for sellers. With an oversupply already in place and additional volumes still set to come on steadily throughout the year in Australia and the U.S.,  there will be no period to allow demand to catch up to supply. Further, with storage levels in certain markets already well ahead of pace, it remains possible the usual price bump expected by towards the end of the calendar year as demand increases could be very muted. By the end of 2019 an additional 3.755 bcf/d of nameplate capacity will be online in the U.S. alone (though some of that will still be ramping up to full capacity.) If there is any faltering in Asian demand, particularly in China, in the next six months, spot prices across the world run the risk of remaining severely depressed.

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