Asian LNG flips back to premium against TTF: Update

Spanish Market: Natural gas
28/10/22

Adds further details throughout

Asian LNG prices have reverted to a premium over prompt contracts on the Dutch TTF, as both European and Asian buying interest dried up with high gas inventories. This has raised the possibility of a return to the status quo of Asian spot prices leading and setting a benchmark for spot LNG trading prices globally.

The ANEA, the Argus assessment for spot LNG deliveries to northeast Asia, was assessed at $30.08/mn Btu and $30.28/mn Btu for first-half and second-half December respectively on 25 October. The November TTF on the same day closed at $28.848/mn Btu, putting the ANEA at a premium of $1.232-1.432/mn Btu over the TTF for the first time on 25 October.

Asian LNG prices have traditionally been the price ceiling for LNG, given that Asian buyers have the lion's share of global LNG buying activity. Asian buyers took up 70pc while European buyers only took up 20pc in 2020, according to the data from LNG importers' association GIIGNL.

But shrinking supplies and increased spot price volatility, coupled with geopolitical instability in Europe, put European buyers in increased competition with Asian buyers for LNG for the first time ever in 2021. The TTF first flipped to a premium to the ANEA on 1 March 2021. Volatility in the ANEA and TTF continued throughout much of 2021, eventually culminating in the TTF at a record premium for the year of $15.565/mn Btu on 21 December 2021, as concerns about low underground gas storage levels in Europe raised European demand to a fever pitch as the northern hemisphere winter loomed.

Prior to 2021, the widest premium that the front half-month ANEA price had over the Dutch TTF front-month price was $8.778/mn Btu on 31 December 2020. The average ANEA premium over the TTF was about $1.416/mn Btu over October 2017 to December 2020.

The TTF premium over the ANEA held over most of mid-April to mid-August 2022. The premium remained even as the front-half month of the ANEA rallied to a new record high of $71.855/mn Btu on 29 August, following a renewed surge in European demand for LNG as buyers sought to diversify away from Russian gas following a perfect storm of various supply disruptions and the Russia-Ukraine conflict. An extended outage at the US' 15mn t/yr Freeport LNG export terminal in Texas and constrained gas flows from Russia increased competition between Asian and European LNG buyers and kept prices supported.

The TTF continued to trend higher and maintain its premium to the ANEA until early October, when it became clear that Europe's underground gas storages were nearing their working capacities. The region's gas storages were 89.03pc filled as of 1 October compared with 80.75pc as of 1 August.

A change in winter strategies

Asian buyers have been relatively modest in their winter purchases compared with the previous winter, despite forecasts of more extreme winter weather.

In reality, winter spot purchases have been occurring but have been dominated by major state-controlled importers such as Japan's Jera and South Korea's Kogas buying on a bilateral basis. Other minor importers in both countries have chosen to either buy LNG directly from state-controlled importers, or buy electricity instead in a bid to cushion themselves from the impact of high and volatile spot prices. This has resulted, ironically, in Asia being so well supplied throughout November and December that availability has since far outpaced demand.

The growing number of cargoes being offered may continue to weigh on prices. The front-half month of the ANEA slipped below $30/mn Btu on 11 October for the first time in slightly over four months.

Chinese and Indian buyers have mostly steered clear of the spot market as elevated prices persisted. Ample pipeline gas flows into north China and an increase in coal-fired power generation has subdued Chinese LNG import demand. Indian buyers also have found themselves overwhelmed with domestic gas, as glass and ceramic manufacturers turn to relatively lower priced alternative fuels such as fuel oil and LPG.

Return to the status quo?

This continued lack of buying interest and glut of available cargoes without a home may inevitably result in a large drop in prices, just to allow sellers to clear the cargoes that they are holding on to.

Market participants have even suggested the possibility of spot prices reverting to pre-2021 levels. The front-half month of the ANEA was at an average of $4.423mn Btu throughout 2020.

But the TTF gas hub remains in contango through to the second half of winter, as Europe looks to a winter with considerably less Russian pipeline gas.

Domestic LNG trades in China once again have provided a reference point for what may be a sustainable clearing level for LNG spot cargoes in the not so distant future. The Argus Hebei LNG delivered trucked price was last assessed at 6,650 yuan/t ($17.525/mn Btu) on 26 October.

By Naomi Ong

Asia LNG premium over TTF ($/mn Btu)

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