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Despite the growing importance of environmentalism and public vigilance regarding the fossil fuel industry, natural gas has retained its importance in the global energy mix. The increase in energy demand and the installation of renewable energy such as wind and solar have reinforced the need for energy production on demand, for which the gas is currently the only alternative. Resource-rich countries are reaping the benefits of an expanding sector, with ever-increasing export volumes.
The largest importers of natural gas remain in Europe and East Asia because of their large markets and low domestic options. This year, however, market fundamentals have been disrupted by unusual developments. Historically, the gap between Asian and European gas centers has been favorable to the former, which has been able to attract more goods because of rising prices. A combination of factors makes the task of the operators more difficult because the apparent destination offering the highest benefits becomes more and more simple.
Historical market characteristics
Historically, natural gas prices in Asia tended to be higher due to low regional production, the large domestic market, and the political decision-making process that favored LNG over competing sources. Related: Growing fear of global economic slowdown limits oil price gains
The Fukushima nuclear disaster in Japan resulted in the closure of the country's nuclear facilities, which increased the demand for over-cooled natural gas, making the Asian country the largest importer of LNG. In neighboring China, the coal-gas policy had a similar effect. Increasing volumes of LNG are being imported to clean the sky over its cities.
Another reason that encourages producers to prefer Asian markets to Europe is the freight differential between basins between the road east of Suez and west of Suez. The shipping costs of LNG to Europe and the return of ships are higher than for the eastern route in Asia.
Finally, Europe has more choices regarding the import of natural gas. Competition between transported natural gas and transported and shipped natural gas has a depressing effect on LNG prices as consumers move to fixed infrastructure energy resources from Russia, Algeria and Norway.
Changing markets
Despite the reasons outlined above, the gap between the European FTT and the Asian JKM is greatly reduced. The mild weather conditions depressed demand, resulting in relatively complete inventories, resulting in lower LNG prices in both regions.
The narrow gap between Asia and Europe has had a favorable effect on LNG shipments to Europe during the first two months of this year, when a number record of cargoes have reached its shores.
However, the situation can change quickly. The evolution of the market environment requires quick thinking from traders to maximize financial results. The narrow gap between European and Asian hubs as well as transport costs mean that cargoes can be diverted at the last moment. A shipment of Russian LNG, for example, changed course before its final destination on the Zeebrugge LNG facility in Belgium because of favorable prices elsewhere. Related: Is this the next big oil disruption in the Middle East?
According to Jean-Christian Heintz, head of LNG brokerage at SCB Brokers SA, "you can see room for more diversions. It is hard to believe that JKM will strengthen in the near future, but the FTT could still weaken as European stocks are full. Currently, European stocks are full at 74%, about 17% above the average of the past five years.
The million dollar question remains how will the price difference between the European and Asian hubs develop? While the situation has changed in favor of the EU in the first two months, more recently, Asia has had the advantage in terms of attracting cargo to its markets. The small difference between centers on both continents means less certainty for buyers and sellers.
"At some point, the market should regulate itself. If you see an offer going to Asia, it should help rebalance. The warehouses, however, are so full that a few fewer shipments may not be enough to change the deal, "said Heintz.
By Vanand Meliksetian for Oilprice.com
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