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    Home»Commodities»NWE LNG ‘out of the money’ versus oil-linked contract prices: Commodity Insights
    Commodities

    NWE LNG ‘out of the money’ versus oil-linked contract prices: Commodity Insights

    August 13, 20244 Mins Read


    Highlights

    Bullish gas, LNG sentiment propels prices vs Dated Brent

    High gas inventories, strong LNG prices deter spot buying

    More bullish sentiment in the European gas complex and underlying concerns about vulnerability to supply-side shocks have pushed spot LNG prices “out of the money” against oil-indexed contract volumes, S&P Global Commodity Insights data shows.

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    Platts, a part of Commodity Insights, assessed the Northwest European LNG marker for August at $12.61/MMBtu on Aug. 12, up around 11% on the week and around 25% on the month.

    At the same time, Platts Dated Brent was assessed at $83.31/b, up nearly 9% on the week but down around 5% on a month earlier.

    Term LNG contracts, especially older ones, have tended to have an element that is priced as a percentage of crude oil, known as the “slope”, which can vary depending on the prevailing market conditions. Typically the lower and upper bounds of the slope are between 11% in a bearish LNG market and 20% in a bullish market; when the market is balanced it will be 12%-13%.

    Given current market dynamics, traders see oil-indexed contracts likely pricing at somewhere between 12% and 13.5% versus Dated Brent. The current Dated Brent price would put oil-indexed volumes with a 12% slope at $9.997/MMBtu and volumes with a 13.5% slope at $11.247/MMBtu — leaving spot prices $12.61/MMBtu out of the money.

    Having been predominantly “in the money” versus oil-indexed contract prices between February and May, then oscillating between competitive and uncompetitive through June and July, the European gas and LNG complex’s more marked reaction to recent geopolitical events compared to that seen in oil markets has pushed NWE LNG prices out of the money.


    “It’s what’s been happening throughout the year in the gas markets… There is no spare capacity so the geopolitical risks in the Middle East and Russia/Ukraine have placed heavy upward pressure on global gas prices and to a lesser extent on the global oil complex,” David Lewis, LNG analyst at Commodity Insights said. “Oil was also weakened by the downturn in global economics more than gas.”

    The weaker global economic outlook across the globe has weighed on energy markets. However, given the current tight waterborne LNG picture, the market still remains susceptible to supply-side shocks, sources said.

    Further supporting the bulls over the bears in the market, is the net-long position taken by funds in the European natural gas futures.

    “I don’t know if it’s a real concern from European buyers trying to compete with Asians for the winter or if hedge funds saw an easy way to drive the market,” an LNG trader said on the continued price hikes.

    Expensive LNG prices relative to gas and oil-linked contract prices, as well as strong European gas inventories, have curtailed spot LNG buying.

    European gas storage levels continue to rise as they approach tank tops. Capacity stood at 87.59% Aug. 11, a rise of 1.52 percentage points on the week, according to the Aggregated Gas Storage Inventory.

    LNG imports into Europe so far this month total 2.67 million metric tons, lower than the same period in July which stood at 2.81 MMt, Commodity Insights data shows.


    NWE LNG prices were out of the money versus the higher 13.5% slope of Dated Brent on July 29, according to Commodity Insights. Sources have seen a downturn in LNG imports due to healthy gas storage as well as expensive LNG prices versus domestic gas and oil-linked contract prices.

    LNG imports into Europe have slowed over the year as demand in the region became more muted; imports fell by 1.53 MMt, or 20% from May to July, Commodity Insights data shows.

    At the same time, the spread between LNG Northwest Europe and Dutch-TTF has narrowed across the year from an average of minus 17.7 cents/MMBtu in May to minus 11.8 cents/MMBtu in July, according to Platts data.



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