

Discover more from Energy Flux
Industrial (in)action
Global gas prices fell even as Australian unions set a date to strike. What gives? EU LNG chart deck: 28 Aug-1 Sep 2023
Global gas markets presented us with another paradoxical situation last week. Prices in Europe and Asia fell even as strike action was confirmed at the Chevron-operated Wheatstone and Gorgon LNG plants in Western Australia.
Prices on front-month Dutch TTF, the European benchmark, spiked when strike fears first surfaced at three Australian LNG plants. One has since reached a deal with union bosses but the Chevron pair, which account for roughly 7% of global LNG supply, could see picket lines erected on Thursday. So last week’s 15% drop in front-month TTF, even as Chevron sought mediation after workers almost unanimously voted against its pay offer, is at first glance a little perplexing.
The lack of dramatic price action could be a simple case of ‘buy the rumour, sell the news’. Strike fears were initially overplayed, and risk of significant supply disruption remains speculative at best. The Offshore Alliance union, which represents around 500 LNG plant workers, is planning “rolling stoppages and work bans” that will “escalate every week after that”.
This is understood not to mean full blown plant shutdowns, at least not at first. The unions have the upper hand, because the cost to Chevron and partners from lost revenue would far outweigh the cost of meeting workers’ demands.
Labour relations were not driving European gas prices last week. October- and November-dated TTF futures dipped to three-week and one-week lows, respectively. Traders are evidently paying closer attention to brimming European storage and autumn weather patterns than the potential for spare LNG cargoes to be pulled towards Asia in the event of the loss of Australian supply.
JKM, the Asian LNG benchmark, was almost unchanged week-on-week, even though gas balances are far more precarious in Japan and South Korea. Gorgon and Wheatstone accounted for more than 18% of Japanese LNG imports so far this year and Japan’s LNG inventories have been “on a free fall since mid-July”, Energy Intelligence reported.
This leaves room for upside price risk on JKM if strikes drag on. The current indifference in Asian LNG spot pricing, combined with the downward correction in TTF, reasserted a slim ‘Asian premium’ for destination-flexible US LNG cargoes, although currently this applies only in October…
…and the best netbacks are to be found shipping to Europe between November and January.
Last week also saw a minor (and overdue) correction in the spot price for LNG in North-West Europe.
The correction restored a semblance of normality to the NWE-TTF spread, with LNG on the water once again trading at a discount to gas held in storage or in the north-west European pipeline system. The recent spread inversion, which signalled for traders to hold LNG on the water rather than unload cargo at European import terminals, has now dissipated.
And yet, more and more vessels are still being used as floating storage. TTF is in steep contango between October and November ($3.20/MMBtu at last close), which is enough to cover operational costs, boil-off gas and the cost of vessel charter from staying put. As a result, freight rates (as predicted) are rising sharply.
The more vessels that are used as floating storage, the fewer spare vessels there are in the market, and the more freight rates rise. This makes it more fraught for traders to bet on holding LNG in the Bay of Biscay in the hope of TTF rallying on colder weather in November and capturing that arbitrage.
Freight rate futures for November traded at nearly $250,000 per day in recent weeks, so sooner or later that arbitrage window will close. When that happens, holding LNG in floating storage ceases to make economic sense and unhedged cargoes will need to offload to stem losses. But if European underground storage facilities are full and autumn is mild, there will be nowhere for the LNG to go. This could precipitate strong downward volatility on TTF heading into winter.
Higher freight rates also erode margins on LNG trade in Asia. The cost of shipping US LNG to Japan or China has risen roughly 50% more than to Europe since mid-June. This is why the best US LNG netbacks are still to be found in markets relatively close to the Gulf of Mexico.
With Asian LNG demand in the doldrums, what would it take for global gas markets to tighten significantly? Full blown strike action across the Western Australian LNG megaprojects would be a flash in the pan, unless perhaps it coincided with an extreme and sustained northern hemisphere cold snap and poor EU renewables, nuclear and hydropower output. As things stand, the odds are against all that happening at once — which would be good news for consumers both in Asia and Europe.
Industrial (in)action
Great read Seb! Thank you!!