Europe faces a colossal energy challenge. In response to the invasion of Ukraine, Western governments have imposed sanctions on the Russian state and private sector. This has had an impact on Russian pipeline flows to Europe, which accounted to approximately 40% of EU gas imports pre-war and have now dropped to below 10%.
More than ever, European importers have had to rely on LNG cargoes to meet demand. According to Platts data[1], imports into Europe surged by 65% in the first three quarters of 2022 versus the same period the prior year. Where does this supply come from? The main exporters into Europe are, in order, the United States, Qatar, and Russia. While flows from Qatar and Russia have remained more or less stable, it is the United States that has captured most of that market growth – U.S. exports have already more than doubled year-to-date versus last year, highlighting the flexibility of the U.S. LNG ecosystem. Cargoes originated on the U.S. Gulf Coast have destination flexibility between European and Asian markets. The price rise in the European markets eclipsed that of its Asian LNG equivalents, which attracted cargoes available in the spot markets.
The surge in LNG imports has had an impact on the pricing of LNG cargoes delivered into the region. Previously, the price of LNG delivered ex-ship into North West Europe was almost identical to that of TTF, the main European gas hub; any small price differences reflecting shipping costs and local supply/demand balances. With import terminal now running at near capacity and thus limiting the amount of gas molecules that can be delivered into the inland market – effectively the TTF market – the price of landed LNG has decoupled from that of the TTF, with LNG now offered at a discount to hub prices. Pipeline restrictions are also limiting the amount of gas that can be shipped eastwards. Import terminals are located in the UK, France, and the Benelux, while it is mostly Germany and its Eastern neighbors that need to replace the missing Russian pipeline flows.
[1] https://www.spglobal.com/commodityinsights/en/market-insights/blogs/lng/102622-europe-lng-russian-gas-ukraine-war
With the introduction of the LNG North West Europe Market (Platts) futures (NWM), CME Group is now offering a futures contract that allows to hedge the LNG ex-ship price in the North West European market. The challenging market landscape has led many market participants to reassess their hedging strategies for European LNG, reasoning that the decoupling that occurred against TTF calls for a new hedging tool. In addition, by offering a product that follows the same pricing and timing conventions as the Platts assessed LNG Japan/Korea Market (Platts) futures (JKM), participants can now effectively price and lock-in the price difference between LNG destination markets in North Asia and Europe. Early trading activity is encouraging, with two participants already having traded an LNG cargo sized (300 contract equivalent) JKM to NWM spread[2] in late October. Finally, and reflecting the increased LNG volumes originated in the U.S., the launch of the NWM contract is a further tool to crystalize LNG value between the main export facilities in the U.S., which take their pricing from the Henry Hub market, and the destination markets in North West Europe and Asia.
[2] https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/lng/103122-february-nwm-traded-for-300-lots-versus-jkm-as-futures-activity-increases-sources
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
