U.S. LNG exporters are set to make further inroads into supplying European gas markets to offset potential shortfalls that are likely following the Russian invasion of Ukraine. In March 2022, the U.S. agreed to supply an additional 15 billion cubic metres (bcm) of LNG to the European Union in 2022.
The shipments, some of which will be re-routed cargoes are expected to provide a welcome boost to the LNG freight markets where rates have fallen sharply in recent months. The cargoes are expected to be hedged via the Sabine Pass to Continent LNG freight market1.
In 2021, the U.S. supplied around 22 bcm of natural gas to the European market, an increase of around 18% from 2020 levels, European Union data2 showed. U.S. gas supplies account for about 23% of total European supply. The European Union expects this to increase further in the coming years as Europe looks to diversify its supply sources. It has pledged to build additional LNG import terminals to handle higher expected volumes.
Chart 1: U.S. natural gas exports to the EU
Source: Eurostat data
LNG vessel demand to rise?
In 2021, there were 248 vessels chartered for LNG which represented around 21 per month. For 2022, higher volumes are expected to cater to the rising exports from regions like the U.S. In January and February 2022, a total number of 48 vessels were booked. LNG Freight futures prices based on the Baltic indices for Sabine Pass to Continent have recovered, partly reflecting an anticipated rebound in cargo supply from markets like the U.S. The front month futures settlement price recovered to just below $35,000 per day but sharply down from the highs of around $240,000 per day in December 2021. LNG freight prices for winter 2022 point to higher levels with CME Group data showing prices around $72,333 per day for the September 2022 contract month, up around $10,000 per day from early October 2021.
Chart 2: Baltic futures LNG prices partially rebound
The U.S. is poised to play a more significant role in the European gas markets. The rise in prominence of the U.S. exporters may also further displace some of the long-standing supply agreements. Higher volumes of U.S. cargoes for export are also having a positive impact on LNG freight prices where shipping rates have increased from close to zero to just under $30,000 per day with futures markets pointing to higher rates heading into winter 2023.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.