By Sarah McFarlane and Oleg Vukmanovic
LONDON (Reuters) – European gas is becoming the dominant price benchmark for global liquefied natural gas (LNG) spot trading this year as the United States finally breaks the seal on exports, hastening Europe’s ascent into a major importer.
Europe’s pricing dominance signals it is the only market which can absorb the coming wave of supply and could also delay the development of a standalone LNG-specific price benchmark.
LNG is amongst the three most traded commodities, alongside oil and iron ore, and the largest market with no global price, relying instead on regional prices.
After years of oil indexed or Asian spot benchmarks such as the Japan Korea Marker (JKM) dominating, European trading hubs such as Britain’s National Balancing Point (NBP) are regaining credibility as a global price signal, as the region looks set to see sharp rise in imports.
Although North West Europe is yet to see a surge in shipments, NBP is gaining prominence because growing supply and weak demand have led to global price convergence, and NBP is the more liquid, trusted price signal to guide pricing in other, less liquid parts of the world.
“When there’s a flood of cargoes there’s only one place that all the excess cargoes can go because it’s the only market that’s big enough to just take it,” said a trader, referring to North West Europe.
Spot cargoes are sold at a fixed price but whereas in the past one might have referenced JKM or a percentage of Brent prices, conversations are now centred on NBP, the trader added.
Consultancy Energy Aspects expects LNG imports into Europe to almost double to around 96 million tonnes by 2017 from approximately 50 million tonnes this year.
It has long been argued that at some point the LNG market would reach a size where it would warrant a global price, but traders and analysts said the latest developments could delay this.
“It will be NBP (for now) which is bad news for that will take JKM or SGX or all these indices back 3 or 4 years, because you already have something you can work with, rather than something LNG specific,” said a trader.
There have been attempts to launch different LNG products by parties including the Japan OTC Exchange, the Shanghai Oil and Gas Exchange, and most recently the Singapore Exchange (SGX) but as yet, nothing has gained traction.
“Through 2015 you saw a lot of convergence around the European hub prices,” Trevor Sikorski, an analyst at Energy Aspects said.
“You have the evolution of a global price for gas and that gas is set on the hubs and the major hubs driving that forward will be the North West Europe’s NBP and TTF and the U.S.’s Henry Hub. At the moment it’s TTF and NBP but just give it a bit of time.”
(Editing by David Evans)
