Europe drives Asian LNG price rally as benchmarks hits fresh peaks – FGE
Quantum Commodity Intelligence – The summer LNG rally that has seen record benchmark prices in Asia have to a large part been driven by European fundamentals as low inventories, limited Russian supplies and high coal and carbon prices all contribute to sky-high TTF European prices, according to a report released by energy consultancy FGE this week.
However, the report also says firm Asian fundamentals have played a part, noting Asia's structural shortage of gas means the region needs to pull in cargoes from the Atlantic Basin, pitting Asian and European buyers against each other.
This typically means Asian buyers must pay a premium over Europe, so demand from Asia impacts how much LNG is available for Europe, which in turn affects TTF prices.
"To secure LNG cargoes, Asian buyers must pay a premium to TTF prices to compensate sellers for the additional cost of shipping cargoes over a longer Atlantic-Pacific route. If the Asian LNG market is tight, the premium will be greater than the incremental shipping costs, which is what the market has been seeing since April 2021."
Europe's TTF is trading around €48 per MWh for October and Asia's JKM marker in the same month is close to $18/mmBtu, or around €52 per MWh, according to Exchange data Tuesday.
FGE sees LNG prices holding firm for at least the short term, as the European gas market remains tight through the coming winter.
"Without a big increase in Russian pipeline or LNG imports, inventories will remain at low levels and continue supporting high TTF prices," said the report, although it noted that weather is always a wildcard that could significantly impact prices, particularly in the case of exceptionally mild or cold winter.
Russia key
But further out, FGE sees European prices moderating, primarily on higher supplies from Russia.
"As we look further out, it is clear that current TTF price levels are unsustainable as we do not see the European gas market remaining tight in the long term.
"The main reason is the abundance of low-cost gas supply available from Russia. Financial and strategic incentives are in favour of Russia increasing exports to Europe. If TTF prices remain high and Russian gas supplies do not respond, European buyers may switch to LNG or even switch away from gas altogether. Our view is that Gazprom will eventually ramp up gas exports to Europe, especially after Nord Stream 2 is commissioned."
Global LNG prices, particularly in Asia, could stay relatively firm for a longer period of time though, as LNG supply growth slows down dramatically in the next couple of years.
The report noted that most of the liquefaction capacity under construction today was commissioned after 2018, and with construction schedules impacted by Covid-19, most will not come online until 2024/25.
Meanwhile, Asian LNG demand growth remains strong, driven by firm macroeconomic fundamentals, a declining share of indigenous production, and rising pressure to reduce coal consumption.
This potentially throws up a scenario where the LNG market is tightening but spot prices are expected to fall from current levels; "The market already recognizes that current prices are unsustainable, with forward JKM and TTF curves showing extremely steep backwardation post-winter 2021."
The report concluded; "Our view on Asian spot LNG is more bullish from 2022 due to tightness in Asian LNG markets resulting in a bigger premium over TTF prices. We may not see a repeat of current levels, but US$10/mmBtu for Asian spot LNG will be a 'new normal' for several years to come until the next wave of LNG supply hits the market in the mid-2020s."