Market eyes alternate pricing tools
Sellers consider more flexible options
LNG bunker players look to use more gas-on-gas pricing
During the European gas crisis in 2022, prices spiked, and supply fears led to a rapid expansion of infrastructure across Europe to increase access to LNG, and while prices have since cooled the new fundamentals led to increased discussions on contract flexibility, as well as optionality for hedging, according to an S&P Global Commodity Insights analysis.
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With the US developing as a swing supplier able to shift export destinations depending on where netbacks are strongest, buyers are also seeking more flexible delivery options as well as alternative pricing mechanisms favoring gas and LNG indices over oil-based contracts.
With oil supplies tightening and gas supplies lengthening, the ensuing price divergence between oil and LNG has added to the impetus for players to look for better risk management strategies based on natural gas or LNG rather than crude oil.
Liquidity in LNG’s burgeoning forward markets has been was minimal until recently, and the development and adoption of Platts JKM has given the market a strong hedging tool to help manage risk.
Several traders have seen growing interest in pricing off Platts Northwest European LNG marker with one trader adding that they have seen, “buying and selling off the [Platts] Northwest Europe [marker]…. It’s not as common [as TTF, an established pipeline gas hub index] but it depends on the player’s position.”
There has also been growing interest in the Platts LNG Northwest European forward curve following volatile price moves in 2022 that quickly incentivized participants to look for alternate hedging tools.
The LNG and gas markets saw wide split in pricing leading to LNG being at a record discount of $29.55/MMBtu to the Dutch TTF gas price on Oct. 3, 2022, S&P Global data shows and participants sought ways to have those fundamentals represented in their hedging tools.
A cleaner hedge for NWE
CME’s NWM contract has traded both as a spread to Platts JKM and ICE’s TFU, highlighting the two main current use cases for the European LNG derivative.
The two Platts Northwest European trades on CME were equivalent to a full cargo of LNG. In its first year from 2022 to 2023, the Northwest European LNG derivatives traded 785 lots, which was higher than the volume traded on the JKM derivatives contract in its first year of launch between 2012 to 2013, according to CME data.
Although the NWE derivatives market started strong, light liquidity remains a concern for participants and that drives them to use the more liquid TTF as a hedging tool.
But relying on TTF still exposes the market to variances between gas and LNG markets. TTF fundamentals may not entirely capture the risks of ongoing geopolitical challenges or LNG supply-side shocks such as outages at Freeport in the US. Furthermore, Europe’s inland pipeline market does not accurately encapsulate the fundamentals of the global waterborne LNG market.
Platts, a part of S&P Global Commodity Insights, assessed the daily spot DES NWE Northwest European LNG marker for June at $9.519/MMBtu on April 19, or a 9 cents/MMBtu discount to the Dutch TTF gas hub price, with traders seeing current market fundamentals working against the typical historical trends. Despite the recent price swings in TTF, LNG price moves have remained stubbornly narrow as buyers bid higher to attract cargo volumes during the injection season.
Current NWE LNG prices are at a $5.66/MMBtu discount to the Platts Dated Brent daily spot assessment on an $/MMBtu basis.
While the US has found a home with Henry Hub indexation for US LNG volumes, Europe may also look to the cost advantage of utilizing an LNG index in Europe through the Platts Northwest European DES spot assessment and forward curve.
The growing supply in the LNG market will also push players who historically signed contracts using oil-index contracts to consider more gas-on-gas and LNG-to-LNG pricing.
Buyers have noted that LNG prices have been ‘in the money’ for the majority of 2024, incentivizing spot activity over contracted volumes priced on oil-indices.
“This has also affected oil linked pipeline contracts with Algeria pushing LNG volumes in recent months as oil-linked nominations to Spain and Italy fall,” David Lewis, LNG analyst at S&P Global said. “It’s particularly pertinent with the situation in the Strait of Hormuz as closure there would affect 20% of LNG and unlike oil there is no strategic petroleum reserve to balance the market and no long-term storage, the market is much more tightly balanced.”
LNG bunkering
In the LNG bunkering market, market players in Europe favor TTF- based pricing due to its liquidity. Across the basin in Asian markets, players tend to price basis the JKM marker although some oil-indexing can be seen in regions such as Malaysia.
“LNG bunkering is most of the time LNG or gas-linked, even if here and there you can use an oil-index. Europe is TTF based, Asia JKM based,” said one Atlantic-based trader.
For those contracts that are oil-based, LNG and gas prices coming off historic highs has changed the dynamics of what the market deems competitive.
“Recently since oil was stronger than gas, oil-indexed sellers are probably having a hard time marketing their LNG and being competitive but in some other cases it has been the other way round,” a second bunker trader said.
The price of LNG bunker fuel in Rotterdam and Barcelona was assessed at $11.419/MMBtu and $11.577/MMBtu, respectively on April 19. Singapore LNG bunkers was assessed at $13.591/MMBtu.
