Rising power demand and installation of renewables such as wind and solar have strengthened the need for on-demand energy production, for which gas is the only alternative currently. Resource-rich countries are reaping the rewards of an expanding industry with ever-larger volumes being exported.
Historically, natural gas prices in Asia tended to be higher due to low regional production, a large domestic market, and political decision-making that has favoured LNG over competing sources.
The nuclear disaster at Fukushima in Japan led to the shutdown of the country’s nuclear facilities, which increased demand for super-cooled natural gas, making the Asian country the largest importer of LNG. In neighbouring China, the coal-to-gas policy has had a similar effect. Ever larger volumes of LNG are imported to clean the skies over its cities.
Another reason for producers preferring the Asian markets over Europe is the inter-basin freight differential between the route East of Suez and West of Suez. The costs of shipping LNG to Europe and returning the vessels are higher than for the eastern way to Asia.
Finally, Europe enjoys more alternatives regarding the import of natural gas. Competition between piped and shipped natural gas has a depressing effect on LNG prices as consumers can switch to fixed infrastructure energy resources from Russia, Algeria, and Norway.
Despite the reasons described above, the spread between Europe's TTF and Asia's JKM has narrowed significantly. Mild weather conditions have depressed demand leading to relatively full inventories, meaning lower prices for LNG in both regions.
The narrow spread between Asia and Europe had a favourable effect on LNG shipments to Europe during the first couple of months of this year when a record number of cargoes reached its shores.
According to Jean-Christian Heintz, head of LNG broking at SCB Brokers, “you can see room for more diversions. It’s hard to believe JKM will strengthen any time soon, but TTF could weaken further as European stocks are full.” Currently, European inventories are 74 % full, about 17 % above the 5-year average.
The million-dollar question remains how the price difference between European and Asian hubs will develop. While the situation changed in favour of the EU during the 1st couple of months, more recently, Asia has had the upper hand when it comes to attracting cargoes to its markets. The small difference between hubs on both continents means less certainty for buyers and sellers alike.
“At a certain point the market should regulate itself, if you see some supply going to Asia, it should help rebalance. Storages, however, are so full that just a few cargoes less may not be enough to change the picture,” according to Heintz.