Looming winter risks coupled with uncertainty over supply in the next few months have sparked spot buying for liquefied natural gas across the West and East Mediterranean hubs despite spot prices being ‘out of the money’ versus contract prices.
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Gas storages across Europe remain healthy, with the European gas and LNG markets remaining structurally bearish. Gas inventories in Europe stood at 95.31% full, according to the latest Aggregated Gas Storage Inventory data Oct. 22.
However, this remained below the 98.43% full at this time last year, with traders having little expectations for Europe to reach tank-top this year.
Despite the healthy underground gas storages and depressed demand from the residential and commercial sectors, a string of recent maintenances, coupled with expectations of tighter supply over winter and a tightening global waterborne balance, has pushed players in the Mediterranean region to procure LNG cargo volumes on the spot market over term volumes despite spot prices being more expensive than oil-linked and Henry Hub indexed contractual volumes.
LNG imports into the West and East Mediterranean hubs stood at 2.72 million mt, or 44 cargoes, this month, according to S&P Global Commodity Insights data as of Oct. 24.
This compared with 2.41 million mt, or 38 cargoes, in September and 3.42 million mt, or 55 cargoes, in October 2023, over the same period, the data showed.
While the ratio of spot-to-term volumes has increased slightly this year into the Mediterranean, notably spot purchases overtook long-term imports in September for the first time recorded by Commodity Insights data. This trend has continued thus far in October and grown.
Of the current total, nearly 79% was imported on the spot market and 21% by long-term contracts. In comparison, 59% was delivered on the spot market and 38% by long-term volumes in September, with the remainder still unknown, while in October 2023 some 14% was imported on spot versus 86% by term.
A string of maintenances in Algeria and Norway over the summer sparked spot buying across Europe. Expectations of a tighter winter balance have also pushed the Med region to purchase more spot cargoes to sate expected demand increases over December and January.
The narrow contango across Europe and weak shipping rates for this time of year have also supported prompt spot buying given the lack of storage and floating incentive.
Traders have pointed to expectations for tight supply in January given the likely expiry of the Russia-Ukraine transit agreement as well as strong demand signals from Brazil and Asia for Q1-2025.
This coincides with market expectations for Egypt to purchase around 15-20 cargoes for Q1-2025, further tightening the Mediterranean market.
“Looking ahead, the anticipated increase in LNG imports into Egypt poses a tightening risk for East Med markets and in the absence of long-term contracts, raises competition for spot LNG volumes coming into the Atlantic basin,” Elizabeth Kunle, gas market analyst at Commodity Insights, said. “This resurgence of imports is significant for W-24 when the global LNG market is already tightened by the delayed start of new liquefaction capacity (LNG Canada) which limits the expected new supply.”
‘Out of the money’
Crude prices have sought a clear direction after a selloff in mid-October, when ICE Brent futures dropped nearly $4/b from the key price level of $80/b.
Since the mid-October price drop, supply-side concerns in the crude market have centered around ongoing developments in the Middle East, and the associated risk premium attached to ICE Brent futures.
An escalation of the conflict between Iran and Israel has the potential for disruption in the Strait of Hormuz, a key channel through which all seaborne crude produced by the Gulf states must pass to reach buyers in Europe, Asia and the Americas.
The geopolitical risks have also supported LNG prices. Further adding to the uplift were expectations of tighter supply this winter, which have kept spot prices elevated in the Mediterranean, putting them ‘out of the money’ versus oil-linked contracts.
Platts assessed the DES Mediterranean marker for December at $12.902/MMBtu on Oct. 23 while the East Mediterranean marker was assessed at $13.112/MMBtu.
At the same time, Platts Dated Brent was assessed at $74.74/b.
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 $8.969/MMBtu and volumes with a 13.5% slope at $10.090/MMBtu.
Versus the 13.5% slope, this put Med LNG at a $2.81/MMBtu premium, while versus the 12% slope this was a $3.93/MMBtu premium.
Versus the 13.5% slope, this put East Med LNG at a $3.02/MMBtu premium, while versus the 12% slope this was a $4.14/MMBtu premium.
For the East Med, the differential against both 13.5% and 12% was the strongest seen since the assessment launch Dec. 20. The Med differential against the 13.5% slope was the strongest seen since Nov. 26 while versus the 12% slope it was the steepest premium for LNG since Nov. 27.
US swing supplier
Ongoing cheap shipping rates coupled with softer prices in the US have helped to fuel spot buying across the Mediterranean.
US Henry Hub contracts are typically priced at 115% of Henry Hub plus a constant. Considering the upper limit of a US LNG Henry Hub-linked contract, that would be around 115% of Henry Hub plus $3.50/MMBtu, which would equate to $5.70/MMBtu on Oct. 23, according to Commodity Insights data.
Although the weaker contract prices have helped to funnel volumes into Europe, cheaper freight rates and a narrow contango down the forward curve has helped to promote spot US FOB deliveries in the global market.
US LNG exports to the West and East Med stood at 10 cargoes this month as of Oct. 24, according to Commodity Insights data.
This compared with eight cargoes in September and 19 in October 2023, over the same period.
Currently, all the US exports to the Med this month have been delivered on a spot basis. This compared to nearly 88% being on spot and 12% on term in September and around 16% by spot and 84% by term in October 2023.
“The shipping constraints in the Red Sea have resulted in fewer cargoes from the Middle East entering the East Mediterranean region, affecting overall supply dynamics,” Commodity Insights’ Kunle said. “The strong premium observed in August-September has softened coming into winter due to the lower arbitrage to Asia freeing spot cargoes and increasing delivery to the East Mediterranean region.”