Europe’s delivered LNG and TTF prices diverge
The price of the continent’s spot LNG trade does not exactly match the benchmark
Even the most casual LNG market observer will be familiar with the trend of Europe as a so-called ‘sink’ for cargoes—receiving the surplus when supply outstrips demand in Asia and other demand centres and far fewer cargoes when the global market is more balanced.
But what is perhaps less well-understood is that, as Desmond Wong, managing editor for the European and Atlantic Basin at price reporting agency (PRA) Platts told the Petroleum Economist LNG-to-Power Emea forum in early November, the price of spot LNG traded and delivered into Europe is not the same as the region’s benchmark Dutch TTF price—be it LNG arriving in the Mediterranean or even northwest European terminals in France, Belgium, the Netherlands and the UK.
The Platts Des Northwest Europe and Des Med indexes held a discount of as much as $0.50/mn Btu to the TTF during the low-price period towards the end of 2019 and during the first quarter of 2020, while in August they rose to premiums of more than $0.20/mn Btu.
“There are big deltas between delivered LNG and European pricing... It is an opportunity for market development” Wong, Platts
“The fortunes of the global LNG market are, to some extent, the same as the fortunes of the TTF or NBP,” says Wong, because whether or not the marginal LNG molecule in the global market arrives in Europe, it affects the European gas price—hence why the price gaps are not larger.
So, when the East Asian JKM price rises, as it did “quite significantly” in recent months to breach $7/mn Btu due to US supply disruptions and Australian production outages in the Pacific Basin, “what that means is the marginal molecule is no longer there, and you end up with a lack of availability of that LNG providing support for the TTF”. In contrast, now that US projects are coming back onstream after hurricane-related disruptions, the TTF “is losing a bit of [upward price] steam on the anticipation that US volumes are available and the arbitrage to Asia is now closed”.
“Wherever the global LNG market goes, it affects the marginal molecule, and the marginal molecule in Europe, believe it or not, is LNG,” says Wong. “And what that means is that you can have a gap in the price of LNG delivered into Europe and the price of gas in Europe.” In effect, Europe demands a discount to receive LNG when there is a lot of LNG available, but, if that LNG is in scarce supply, it commands a premium over pipeline supply should buyers want to secure it.
Perhaps unsurprisingly from his PRA perspective, Wong sees potential opportunity for the development of additional financial instruments for hedging the risk posed by these price spreads, arguing that they cannot be adequately covered by the existing exchanged-traded TTF or NBP futures market. “The problem is that we do not have a forward curve or derivative to manage the risk around LNG delivered into Europe.
“There are big deltas between delivered LNG and European pricing... there is a lot of exposure that people are facing,” he argues. “It is an opportunity for market development.”
Wong clearly has a valid point that the TTF futures market does not provide a perfect hedge when LNG delivered into Europe trades at a spread to the benchmark. But it is difficult to see how a sufficiently deep and liquid new market could grow up in parallel to the TTF, which is second only to the US Henry Hub in global terms, to manage this risk more efficiently than simply accepting TTF as a ‘good enough’ proxy.
And the situation could change. Wong notes that there has been significant interest for producers in securing existing and new LNG regasification terminal capacity. “Sellers and producers want to be able to secure access to downstream markets… They want to secure a location where they can put supply versus any optimisation that they have. Fundamentally, Europe is a sink and not a massive demand market,” he says.
A decline in indigenous Europe’s pipeline gas supply… will make the region more reliant on imports. And that may mean more contracted LNG arriving
While this is true for now, a decline in indigenous Europe’s pipeline gas supply, particularly in its northwest demand centre, will make the region more reliant on imports. And that may mean more contracted LNG arriving rather than the current sink approach.
Buyers will demand that these volumes are explicitly linked to their alternative price of supply, in effect TTF or NBP-linked. And that could mean a lot more LNG arriving into Europe at a price much more inextricably linked to existing benchmarks.
Petroleum Economist's second virtual LNG to Power Forum took place earlier this month with a focus on the opportunities and challenges for LNG across the Emea region. This virtual event included eight hours of high-quality content, with a focus on engaging and interactive live panel discussions. Content is now available on demand. Click here to access it.
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