Spot LNG competitive with oil-linked contract price
Global non-long-term LNG volumes grew 12 million mt in 2023
Prices expected to soften further after April
This story is in the first of a two-part series exploring the growing global interest in spot LNG deals and how a shift to more flexible contracts will become crucial as the market continues to change.
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Weakening LNG spot prices are sparking buying interest for spot volumes as current prices are approaching parity with oil-indexed long-term pricing, according to sources and an S&P Global Commodity Insights analysis.
The Platts DES Northwest Europe Marker for March was assessed at $8.317/MMBtu Jan. 29, up 3.1 cents/MMBtu for the day but down 67.1 cents/MMbtu since the start of the month, in what is typically one of the highest priced months of the year.
“At these levels, prices will touch the long-term contracts,” an LNG trader said. Another trader added that with prices getting closer to those oil-based contracts, participants are even leery of gas-based prices noting that “players are cautious on taking discounts against TTF that are off the money right now.”
Sources expect the current bearish trends to continue throughout the heating season and for prices to decrease even more from April onwards as lower seasonal demand kicks in.
“Global trade of non-long-term LNG volumes grew by just over 12 million mt year-on-year in 2023, increasing to 36.6% of the LNG market… We estimate that the volume of LNG traded not under a long-term contract at all or a portion of its journey reached 150 million mt in 2023, representing 9% year-on-year growth,” Kelli Krasity, associate director at S&P Global said in a report. “This marks a significant reversal of the previous year’s trend, when non-long-term activity declined as a share of overall LNG trade as the massive surge of European LNG demand prompted many European LNG traders and aggregators to redirect cargoes back to their flexible long-term positions.”
Krasity and market sources added that as spot LNG prices fell from their record high 2022 levels back to slightly more affordable levels, buyers were less determined to rely on long-term contracts.
As a result of high inventory and a so far mild winter, European LNG prices have rapidly tumbled to levels comparable to long-term oil indexed contract volumes. Atlantic LNG buyers suggest that as prices reach the $8/MMBtu to $7/MMBtu range, buyers will begin to “reduce their pipeline contracted volumes and gas supply and begin buying more spot LNG cargoes,” a trader said.”
“For LNG, the minimum contract price is around 10% of Dated Brent, so say Dated Brent is $75, then the minimum price would be $7.5/MMBtu,” a Mediterranean LNG source said. “Traditionally, in the Far East and Atlantic basin, prices are around 10% to 11% Brent. In long term contracts, spot LNG is always priced around 11% Brent.”
Platts last assessed light sweet North Sea benchmark Dated Brent at $83.37/b on Jan. 26, and With LNG at price $8.317 this puts Northwest European LNG prices at around 10% of Dated Brent.
Several sources explained that when the market is tight, typically volumes are priced around 11% to 20% against Dated Brent; when the market is balanced it will be between 12% to 13% and when the market is bearish, generally prices won’t fall below 10% otherwise buyers will prefer to buy spot LNG.
“10% to 12% was the typical way to go for pricing against Dated Brent before the gas crisis [between 2021 to 2022], and that was decent but you may see that change in the near-term,” a European based source said.
Challenges in moving to spot from contract
Buyers and sellers in the market also said that the flexibility of switching to spot trading is highly dependent on the diversity and size of their portfolio. A big portfolio could allow them to engage in relatively more spot trading, while undertaking the risk associated with the volatility of the spot market.
The degree of participants preferring spot over term would also be influenced by how old the term contracts are. Contracts pre-2022 tend to be more Brent-linked than the ones signed after. Post 2022, LNG traders have seen increasing amounts of gas and LNG based contracts, with JKM, Henry Hub and TTF being the growing price indexes.
With the spot market continuing to grow in the Atlantic and Pacific regions, sources suggest that spot trading market share may continue to grow in the future.
The Ukraine crisis had briefly sent importers scurrying for the protection of contacts, some as long as 27 years, to manage energy security concerns. Through 2022, several buyers in places like Japan were largely protected from price volatility and supply scarcity because they were well contracted while India and China gave up nearly 20 million tons/year of spot supply that went to Europe.
But LNG origination executives, who are in charge of long-term procurement strategies in gas companies, said once the baseload requirement has been satisfied by long-term contracts, there is growing appetite to expand the flexible portion of portfolios.
Older long-term contracts which may be expiring open the door for new flexible agreements and potentially medium-term to spot agreements, sources said. While legacy contracts may be more rigid, newer contracts allow players to have greater flexibility around destinations, seasonal deliveries and shifting away from oil indexed prices. Traders added that this will allow participants to be able to react to the uncertainty in the market better and have a short, medium and long-term procurement strategy.
