Europe is still outperforming Asia in the competition for LNG

LNG supplies to Asia may decline as the winter season approaches due to the closure of the US-Asia and Africa-Asia arbitration windows, Platts said. In the event of a winter cold snap or temporary supply constraint, Asian utilities may have difficulty purchasing spot cargo. The main reason for the decline in supplies from the US and Africa to Asia remains high tanker freight rates.

The closure of the Asian arbitrage, that is, the economic unattractiveness of supplies to Asia, threatens winter LNG supplies from the Atlantic basin to the east, Platts wrote on October 2. Asian buyers’ access to spot supplies could be limited if there are severe frosts or production problems in global markets, the analyst said.

This year, there has been softer competition between Asia and Europe for LNG cargoes than in 2021-2022. This year, suppliers are shipping fewer cargoes from the Atlantic Ocean to Asia due to high freight rates, increased capacity at European terminals seeking to use LNG to replace reduced pipeline gas supplies from the Russian Federation, and fears of disruptions to transit through the Panama Canal in the winter. The Platts JKM index, which reflects the cost of LNG supplies to Northeast Asia, rose to an average of $12.5 per MMBtu in the third quarter from $10.9 per MMBtu in the second quarter. The level of gas reserves in storage facilities in both Europe and North-East Asia is now at sufficient levels. Because of this, demand for LNG in Europe now remains weak: in September, LNG imports into the continent fell by 9.5% year-on-year, to 8.9 billion cubic meters. This is the minimum figure since December 2021, according to GIE data.

The arbitration window between the US and Asia has been closed since April. As of September 29, the spread between JKM and the LNG price in North-West Europe, taking into account freight rates to North Asia and North-West Europe, respectively, was minus $0.59 per MMBtu, according to S&P Global data.

Similarly, the arbitration window between Africa and Asia has closed, where the spread on September 29 was minus $0.98 per MMBtu, including freight, writes Platts. This indicates a discount for cargo arriving in Asia compared to Europe.

The spread between Asia and Europe in November is estimated by traders to be around $0.5 per MMBtu, which suggests that Europe could pick up more cargo than Asia this coming winter. For Asian arbitrage to occur, the spread between Asia and Europe must be at least $1.5 per MMBtu to cover the more expensive freight.

In the second and third quarters, tight spreads caused U.S. LNG cargoes to primarily go to Europe rather than Asia. As of September 29, the volume of imports from the United States to Europe exceeded that of Asia, amounting to 16.73 million tons versus 6.71 million tons. LNG cargoes from Africa were also disproportionately destined for Europe rather than Asia over the same period: 3.74 million tonnes versus 3.16 million tonnes.

If severe frosts hit both Europe and Asia this winter, the market will expect a “fascinating price rally,” said Maria Belova, research director at Implementa. She recalls that for most of last year, the EU was the preferred LNG market compared to Asia, but rather because Asia allowed Europe to win the price competition: at that moment, Covid restrictions were still in force in China, and the country allowed its companies to redirect significant volumes of LNG originally intended for China itself. “This year, in the event of a gas shortage, the Asia-Pacific countries will either limit demand, which is unlikely, or prices on the spot market will reach a level at which they will become more attractive for LNG suppliers than quotes in the EU,” she believes.

Tatiana Dyatel