US LNG to favour Europe over Asia amid low shipping costs

LONDON (ICIS)–European gas and Asian LNG May ’21 contracts have vied for the position of cheapest prices since the start of March amid volatility in the wider energy complex and an uncertain supply outlook.

However it remains cheaper for US LNG producers to sell into the European market instead of Asia amid favourable shipping costs.

MIXED EUROPEAN SIGNALS
Supply signals for European gas markets appear mixed for May.

Recent ICIS analysis highlighted that British NBP and Dutch TTF gas May contracts may be undervalued given that significant Norwegian gas infrastructure maintenance will be concentrated in Q2.

In the Netherlands, quarterly summer spreads at the TTF suggest injections could be highest during the first half of the summer. European stocks were depleted during the winter amid tight supply margins and low LNG arrivals and are currently 25% full, a three-year low.

However, LNG flows into Europe are set to strengthen going into the next quarter amid improving spreads to global gas markets, while Asian demand is set to decline following the peak winter period. This could offset supply concerns elsewhere.

There are indications that the NBP gas market could be oversupplied in April due to strong LNG imports and little export capacity booked for the month. This could pave the way for comfortable supply margins in May and sustained discounts to the TTF, with Britain the most likely destination for flexible cargoes.

Carbon could also have a strong impact on European gas curves moving forward. Increased volatility in the market has seen it record stronger relationships with the wider energy complex in 2021.

The ICE EUA Dec ’21 is in a bull run, with a new settlement high of €42.99/tCO2e recorded on 17 March. The contract was trading above €43.50/tCO2e early on 18 March and early strength was also recorded in European gas curves.

ASIA ALIGNS WITH EUROPE
Softer demand and reduced volatility have removed support from spot LNG prices observed at the beginning of the quarter, and led to a closer alignment between the ICIS East Asian Index (EAX) prices and European gas curves in March.

Regionally, a flurry of deals from Kuwait Foreign Petroleum Exploration Co (KUFPEC) and Indian grid operator GAIL stabilised EAX prices midweek.

US UPSIDE LIMITED
Shorter-dated US Henry Hub contracts have trended downwards in week 11 with mild weather forecasts set to lead to declining weather-driven demand.

The bearish models have opened the possibility that storage injections could start at an earlier rate than previous years, particularly following high withdrawal rates last month amid cold weather supply disruption.

Europe is likely to remain the preferred destination for US LNG sellers, with profit margins higher amid lower shipping costs.

On 17 March, the TTF May ‘21 held a $2.612/MMBtu premium over the estimated delivered US cargo cost, when full-cost round shipping from the US Gulf to the Netherlands is included.

In contrast, the EAX March ‘21 held a $2.042/MMBtu premium over the estimated delivered US cargo cost, when full-cost round shipping from the US Gulf to Japan is included.