London-based Timera Energy published a client brief today entitled: “U.S. [LNG] Export Flows, the Supply Glut, and Europe.” Timera observes that: “Europe is playing a ‘behind the scenes role’ in supporting the LNG market. U.S. export volumes are being priced, optimised, and hedged based on European hub price signals.”
- U.S. cargo flow decisions are strongly influenced by NBP and TTF as liquid pricing benchmarks against which LNG portfolios are optimised, even though only a portion of cargoes actually land in Europe. This dynamic is magnified by the fact that significant volumes of U.S. export capacity are held by LNG aggregators who have flexible portfolios and a strong focus on portfolio optimisation.
- Liquid N.W. European gas hubs have been the key driver of regional LNG spot price signals since the gas glut started… in the summer of 2014. There have been brief periods of regional price divergence from Europe (e.g. Dec 2016 – Jan 2017). But the role of Europe as the market of last resort provides the benchmark from which regional spot prices are determined (e.g. in Asia and Latin America).
- One of the most important implications of U.S. export growth is the rising influence of the U.S. Henry Hub price signal on global gas prices. Henry Hub prices drive the variable cost base of existing U.S. terminals. They also determine the long run marginal cost (LRMC) competitiveness of new U.S. export supply.
- As new U.S. export projects are commissioned and the LNG glut intensifies, European hub prices are likely to further converge with Henry Hub. This should increase the importance of a converged trans-Atlantic hub price signal in setting regional LNG prices, with the U.S. gas market providing global price support through the glut.
We [still believe] the LNG glut will remain the dominant driver of gas market dynamics for the next three to five years. But market tightness may return with a vengeance next decade unless Financial Investment Decisions (FIDs) on new LNG supply are taken soon.