North East Asian spot LNG cargo prices for delivery four-eight weeks ahead continue to increase, adding another USc 40/mmbtu to hit USD 19.40/mmbtu (USD 685/mcm), easily the highest in the last two years. NE Asian spot LNG prices are now around USD 4/mmbtu (USD 141/mcm) above the price of contracted LNG volumes, we estimate. That is a testimony to the tightness of the market which has been driven both by the colder than normal winter in NE Asia and, we believe, strong competition for cargoes from non-traditional markets, notably in Latin America. At this level, spot LNG is at price parity with Brent.
Brazil has been bidding aggressively for LNG cargoes as drought has reduced hydroelectric capacity forcing a turn toward gas fired generation for which imported LNG is needed while Argentina has also reportedly been bidding aggressively for cargoes.
Rising ex-European prices for spot cargoes have begun to pull up European spot LNG prices which have jumped almost 30% since the start of the year to USD 14.70/mmbtu (USD 519/mcm) and are now comfortably ahead of our estimate for the generic European oil-linked contract price of USD 12.90/mmbtu (USD 455/mcm). However, perhaps not surprisingly, it would appear that no spot deals have been done for Europe, given the much higher prices available globally.
The likely implication is that LNG supply to Europe might have dropped even further, which we believe is likely to be the key driver explaining the tightening of the European spot gas price toward the generic oil linked price. That has closed from a 40% discount in the summer to a 20% discount currently, despite a fairly average winter.
Besides high levels of demand ex-Europe, delays to the start-up of the relatively limited new LNG manufacturing capacity due onstream in the near term, notably Angola LNG, and ongoing production limitations at a number of other plants, notably in Egypt, potentially represent a further tightening of LNG availability to Europe. As we have discussed previously, we expect tightening LNG availability to Europe to result in robust pricing for spot gas relative to oil linked.