Pushing the boat out

There’s no safe place to put all the gas. EU LNG chart deck (4-15 Sep 2023)

There’s been some talk in the commodities press about gas traders holding LNG in floating storage to capture higher European gas prices in November and December. The reality is that this bet is becoming increasingly fraught, because European demand is yet to show signs of strong recovery in those early winter months.

The contango on Dutch TTF is definitely still there, but if anything is has eased a little in the last two weeks, as the front month (October) rose slightly while the rest of the curve softened.

The sharp rise in freight rates in recent weeks tells us the market for LNG vessels is tightening, which is usually indicative of oversupply somewhere between the main exporting and importing regions requiring gas to be held on the water.

Spark Commodities said in a note last week that freight rates would have to soar to $300,000 per day in October to close the window on the Oct-November arbitrage opportunity. Clearly we are quite some way from that happening.

October-dated TTF is still trading at a notable discount to November, but the price differential between those months — AKA the ‘calendar spread’ — is narrowing.

In fact, it peaked at $3.54/MMBtu on 6th September and at last close was $2.66/MMBtu.

Traders making that bet today would be better off floating their cargo into December. The Oct-Dec spread is currently $4.35/MMBtu, having fallen from a peak of $5.40/MMBtu on 6th Sep.

Traders don’t make these bets unhedged so are unlikely to be at risk of losing money if the arbitrage window closes completely (which is also still unlikely). But the point in all this is that Europe can’t absorb any more gas and is pushing it into other places until it is needed.

These ‘places’ carry certain risks. LNG cargoes moored in the Bay of Biscay must account for the additional freight cost while staying put, and boil-off gas (which varies greatly by vessel age/type and depending on sea conditions).

One gas market source told Energy Flux that current charter rates and BOG costs could easily “kill any profit coming from the contango”.

Also, vessel owners are likely to have agreed to position their ships for early winter Atlantic loadings rather than leave them speculating on the Nov or Dec TTF price. And remember that anyone extending their float bet into December needs capacity at a European LNG terminal, which is in short supply this time of year. Holders of such capacity will probably already have booked delivery from elsewhere for December rather than leave it open, which makes the extended Oct-Dec arbitrage play harder to pull off.

Europe is full

Traders are also pumping gas from the EU network into Ukrainian storage facilities. This is not unheard of and these cavernous facilities are located well away from the frontline. But storing gas in a war zone speaks to the lengths that Europe will go to to ensure supplies over the winter.

We don’t yet know whether traders have opted to float their LNG cargoes into December. Data from Refinitiv, provided via

Data Desk

, shows a slight uptick in vessels being used for this purpose in September. But this is not (yet) anywhere near the huge surge we saw late last year, when all manner of gas and energy price records were smashed.

The market seems to be pricing in an agglomeration of LNG in North-West European (NWE) waters. The spot price for NWE LNG has now fallen below front-month TTF, indicating ample supply. Notably, looking at the forward curve the discount has narrowed significantly in mid-winter, which could be a signal to draw more vessels into NWE as Europe’s gas stocks become depleted.

Europe will have to compete with Asia for marginal cargoes in January and February. The profitability of shipping destination-flexible US LNG to Europe versus Asia sits on a knife edge in those months.

The global gas balance over winter is shaping up to be precarious. Outages at Freeport LNG and extended maintenance at the Troll gas field in Norway are tightening supply, and there remains a threat of Australian strikes dragging on and curtailing output at Gorgon and Wheatstone.

Not that this is reflected in the Asian LNG spot price. Lacklustre demand is keeping a lid on JKM, the Asian benchmark, despite reports of Chinese oil major Sinopec issuing a tender for 25 cargoes over winter.

With long-range forecasts prognosticating a mild start to winter, gas markets will probably remain subdued over the coming weeks barring any major disruption the supply-demand balance. And since industrial demand for gas looks to have dropped to a structurally lower level, such disruption s more likely to come from the supply side of the ledger.

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