LNG exports from West Africa to Europe are making up a bigger share of volumes in August despite favorable arbitrage economics to Northeast Asia, because of relatively cheaper shipping costs and lower oil-linked contract prices to the Continent, according to traders and S&P Global Commodity Insights data.
Register Now West African LNG exports reached 930,000 metric tons, or 13 cargoes, in August as of the 25th, Commodity Insights data showed.
According to analyses carried out by S&P Global Commodity Insights, of the total, nearly 37% was exported to Europe, followed by about 23% to the Middle East and North Africa region and almost 9% to North America. The rest was yet to be nominated.
This compares with 1.07 million metric tons, or 16 cargoes, during the same period in July, with 56% of the volume exported to Asia, followed by 25% to the MENA region and nearly 19% to Europe.
During the same period in August 2023, about 810,000 metric tons, or 12 cargoes, were exported by Nigeria, with 74% going to Europe, 19% to North America and the rest to Asia.
Arbitrage economics
Arbitrage economics out of Nigeria to Northeast Asia are stronger than delivering cargoes to Europe.
The East-West arbitrage window for LNG cargoes loading from West Africa is open. The first-half October JKM to second-half September Northwest Europe spread considering freight rates from West Africa to North Asia and NWE strengthened to 25.2 cents/MMBtu on Aug. 23, from a negative 27.6 cents/MMBtu and a negative $3.442/MMBtu, respectively, in 2023 and 2022 as of Aug. 23, Platts data showed. The spread, however, narrowed on the session by 4.5 cents/MMBtu. Platts is part of Commodity Insights.
Nigerian freight rates to NWE were lower at 98 cents/MMBtu as of Aug. 23, against $2.19/MMBtu to Japan/South Korea, according to Platts data.
Platts assessed JKM — the benchmark price for delivering cargoes into Northeast Asia — at a premium against the NWE marker of $1.241/MMBtu.
This compares with the JKM-NWE differential of $1.712/MMBtu as of Aug. 23, 2023, when more exports were headed for Asia, and 84.2 cents/MMBtu as of the same date in 2022, when more exports landed in Europe than Asia.
A trader said that, despite the DES price difference between Asia and Europe, limited shipping availability allows them to send cargoes to Europe and share the margins between buyer and seller.
“There is a difference in the freight available for the Atlantic versus the two bases [Atlantic and Pacific] where the difference is $20,000-$40,000/d,” the trader said.
Lower oil-linked contract prices
More bullish sentiment in the European gas complex and underlying concerns about vulnerability to supply-side shocks have pushed spot LNG prices “out of the money” against oil-indexed contract volumes.
Term LNG contracts, especially older ones, have tended to have an element that is priced as a percentage of crude oil, known as the “slope”, which can vary depending on the prevailing market conditions. Typically the lower and upper bounds of the slope are between 11% in a bearish LNG market and 20% in a bullish market; when the market is balanced it will be 12% to 13%.
Oil-linked contracts are currently around a 12% to 13.5% slope versus Dated Brent across Europe and Asia, trade sources said. Meanwhile, Nigerian oil-linked contracts are usually at a lower slope plus a constant.
Considering the highest Nigerian oil-linked contract of about 9% of Dated Brent plus a constant of 2.01, it equates to around $9.306/MMBtu, Platts data showed. This puts JKM at a premium of $4.137/MMBtu versus the contract price and NWE at a premium of $2.896/MMBtu.
Of the total Nigerian LNG exports so far in August, the largest recipient has been Portugal, accounting for nearly 23% of the exported volume.
“[Portugal’s] Galp Nigerian LNG supply may be advantaged given the contracts were signed at a time of low oil slopes,” Domitille Lainey, associate director, and David Lewis, LNG analyst, at Commodity Insights said
