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Traders playing the Atlantic-Pacific LNG price spread

Traders are taking advantage of the Atlantic-Pacific LNG price spread, but the window may be about to shut

Gunvor is buying liquefied natural gas (LNG) in Europe and selling it to Japan, playing the ever-increasing price spread between Atlantic and Pacific markets since the Japanese earthquake.

Despite the cost of reloading LNG at the Zeebrugge terminal in Belgium, port charges and the cost of chartering a tanker to carry the gas half way across the world, global energy trader Gunvor still stands to make a healthy profit because of rising Asian spot-LNG prices.

“People are talking about a $7/million British thermal unit (Btu) spread. Even with reload cost, port charges and freight, it still looks like a good $4/million Btu margin,” said one LNG trader. The likelihood of more European LNG going to Asia is high, until regional gas prices align with Asian LNG.

The 127,000 cubic metre WilGas tanker left Belgium on Tuesday after loading, according to the Zeebrugge port authority. Market sources said Gunvor chartered the WilGas from Norwegian owners Awilco to deliver to Tokyo Bay for Japanese utility Tokyo Electric Power (Tepco). The cargo, sold by EdF Trading, is thought to have been priced at over $15/million Btu.

Only four other LNG cargoes have been shipped out of Zeebrugge over the past 12 months. Two stayed in Europe, one went to Brazil and one to Japan, in October last year, according to Lloyds List Intelligence.

But Zeebrugge could become an attractive terminal to load up cheaper LNG for delivery to Asian buyers if the price spread remains or grows. “Anyone with Zeebrugge capacity could be looking to send cargoes to Asia. It’s just a matter of timing and if they have direct access to buyers. It seems to be a handy option when there's a healthy arbitrage opportunity,” one LNG trader said.

But other traders were more cautious and speculated that the spread may be as small as $4/million Btu and only worthwhile if the WilGas can be dropped off at Singapore and not returned to the Atlantic.  Further profit margin losses include evaporated LNG from cooling down the tanker and Suez Canal charges.

Tight tanker market

The LNG price difference between the Atlantic and Pacific basins is more than enough to compensate for high LNG tanker charter rates, according to shipbrokers. “When one region is priced significantly higher than the others, the additional profits to be made on the diverted cargoes allow traders to pay higher charter rates, if necessary,” said Gibsons.

“This is somewhat different from other markets, as LNG freight rates are relatively high compared with cargo prices. For this reason, the tightness of the LNG shipping market isn’t enough to push charter rates to stratospheric levels. To reach ‘bubble’ levels, the market needs a tightness of shipping capacity, a high LNG spot price and a large arbitrage,” the shipbroker adds.

Spot LNG-tanker charter rates of less than six months have nearly tripled over 12 months to just under $100,000 a day. Short-term rates of six months to two years have doubled to around $100,000/d over the same period, according to the latest Gibsons report.

Traders trying to take advantage of the arbitrage opportunity have found it difficult to break into a market dominated for decades by traditional buyers and sellers – opportunities are slim because of limited free capacity at import and export terminals, as well as a tight LNG tanker fleet.

But it has not stopped new financial players trying. Before Gunvor, Morgan Stanley sold LNG volumes to Argentina earlier this year; while trading house Vitol re-exported a cargo to Kuwait from Zeebrugge in March 2010.

Price-spread window

But the window to load up on Europe’s cheaper gas and take it to Asia may close in the next few months, with European gas prices forecast to rise as the market competes for LNG cargoes. UK NBP gas prices – used as a benchmark because it is the most liquid hub in Europe – have fallen in recent weeks following high LNG imports and worries over gas demand from faltering European economies.

“Because UK NBP remains at a significant discount to Asian spot-LNG prices, the rebound in UK imports is likely to be transient – incentives are still in place for cargoes to be diverted to higher-paying Asian markets,” said Goldman Sachs in its latest commodities-research report. But, “heading into the fourth quarter, expect UK markets to tighten, driving NBP higher to compete for LNG cargoes.”

Oil-linked pipeline gas, mostly delivered under long-term contracts, might also pull prices up. The latest IMF figures show the German-Russian border price is around $11/million Btu, compared with NBP spot prices of $8.5/million Btu.

Other analysts are less bullish on NBP prices, indicating that producers would still be willing to send LNG to the UK as they had done over the high summer demand season.

The threat of cargo diversion

“Japanese LNG imports typically peak during the summer cooling season, in July or August. Yet UK LNG imports in June and July did not drop by more than they did last year and have even risen in the first few days of August,” said Deutsche Bank in a note. “Japanese imports in December and January can be almost as high as the summer, so the threat of cargo diversion is real, but has yet to materialise because of record summer imports.”

LNG may also continue coming to Europe, as the world’s largest producer, Qatargas, would prefer not to sell spot cargoes to Asia, but wants to secure more-lucrative and stable, long-term, oil-indexed contracts.

In any case, Japan may be approaching the limit of how much LNG it can buy. Imports have rocketed since the March earthquake disabled a number of nuclear power reactors, driving up gas demand, but Tepco, the most affected utility, may have stocked up enough fuel already to meet high winter consumption.

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