US LNG Exports Defy Arb Economics by Flooding Europe Over Asia
10.30.2023 By Tank Terminals - NEWS

October 30, 2023 [S&P Global]- Recent delays at the Panama Canal have pushed more supplementary LNG volumes into Europe, sources said, despite US to Asia arbitrage economics overpowering economics to Europe in the prompt.

 

lthough traders await the start of an intense price competition between Europe and Asia this winter, milder temperatures in China and across Europe have been keeping the current fight for US volumes in check.

Platts, part of S&P Global Commodity Insights, assessed the December JKM — the benchmark price reflecting LNG delivered to Northeast Asia — at $18.54/MMBtu and the JKM Balance Month-Next Day derivatives at $18.70/MMBtu Oct. 24. Platts assessed H1 December at $18.357/MMBtu, and H2 December at $18.722/MMBtu.

The Platts DES Northwest Europe Marker for December was assessed at $15.708/MMBtu Oct. 24, while H1 NWE December was assessed at $15.608/MMBtu and H2 NWE December at $15.808/MMBtu.

Typically, with prices in Asia for LNG being higher, any extra tons out of the US should head to Asia, where the netbacks from the US Gulf Coast are stronger.

However, while freight rates from the US Gulf Coast to Japan and Korea have cooled slightly, they remain significantly higher than the journey to Northwest Europe.

The freight cost from the US Gulf Coast to Japan and Korea was assessed at $3.41/MMBtu on Oct. 24, down 4 cents/MMBtu on the day. The US Gulf Coast-Northewest Europe route was assessed at $1.63/MMBtu Oct. 24, down 8 cents/MMBtu on the day.

Arbitrage economics between US and Asia remain favorable in the near term, but sources do not see fundamentals supporting sending additional volumes to Asia from December. Backlogs and limited slot availability at the Panama Canal have caused the flow of new product to make its way towards Europe rather than Asia.

“[The arbitrage to Asia] is open but still LNG is heading to Europe. [It is] still shoulder season I suppose,” a market source said.

 

US Gulf Coast delays

While US production continues to ramp up, the continuous traffic and waiting times have limited the surplus of volumes entering the global market.

“Relatively low traffic for bulk (3%) and LNG carriers (6%) all worked so far this month in favor of LPG carriers,” analysts at S&P Global Commodity Insights said. “However, a change in the current trend of lower traffic for the two segments could change anytime soon.”

The analysts and sources added that both freight rates and prices could remain firm, but it will be dependent on the US and Panama delays tightening up the supply side, rather than fresh demand emerging.

What may provide some supply support is that US NGL and LNG exports are slowly recovering after the slowdown in mid-October due to issues with compressors at three US Gulf Coast terminals, including Enterprise, Energy Transfer Partners and Phillips 66.

“The Gulf Coast logistics issues persisted in late October, but the force majeure on cargo liftings, which was issued during the second week of October, is expected to be lifted ‘soon’,” the analysts at S&P Global said.

 

Europe top of the podium

Despite the favorable arbitrage economics, US exports to Europe continue to increase.

US LNG exports currently stand at 6.24 million mt as of Oct. 25, up 1.09 million mt since the start of the week on Oct. 23.

Of the total, 3.28 million mt was headed to Europe and 350,000 mt scheduled to land in Asia. The remaining tons were spread out elsewhere or yet to be nominated.

Volumes headed to Europe made up nearly 53%, slowly climbing from the 50% seen at the beginning of the week.

Sources pointed to waiting times at the Panama Canal ranging anywhere between five to 15 days, making selling cargoes to Asia less economical than to Europe.

Traders and distributors also pointed to the delays potentially causing issues with domestic supply in the US, with storages potentially being overfilled in the US and demand remaining subdued in the near term in Asia and Europe, the underlying bearish fundamentals could take hold and push away the bullish views.

Current above-average weather conditions have subdued sentiment across Europe and Asia, with most US volumes still finding homes in Europe. However, sources suggest that once a cold snap strikes Asia the price competition between the regions will intensify and both Europe and Asia will have to begin pricing higher to attract the necessary volumes for winter should storages deplete quickly.

 

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