European LNG to gas hub spreads tighten up
The significant dislocation in DES European LNG to gas hub prices in 2022 (e.g., max spread of 9.16 $/mmbtu to TTF since CME Group NWM derivative launched in October) reflected the emergence of regasification capacity constraints in Europe, catalysed by the abrupt pivot from Russian gas to LNG.
European LNG imports increased to 154 bcm in 2022, up 66 bcm (+ 74%) from 2021 levels, with average utilisation increasing from 41% in 2021 to 69% in 2022. The situation was even more acute on an intra-European level, as interconnector bottlenecks between different markets exaggerated constraints. Capacity in markets such as the UK and& ES went relatively underutilised, while those markets historically more dependent on Russian gas (i.e., CNWE and& IT) saw terminal utilisation at or above nameplate.
While European LNG imports have continued to increase over the first three months of 2023 (+ 3.2 bcm vs 2022), a rapid buildout of European regasification capacity has eased bottlenecks, leading to a convergence in NWM – TTF spreads. In 2022, three new FSRUs were commissioned, alongside brownfield expansions at three existing terminals. A further three FSRUs have been commissioned in the first quarter of 2023, to be followed by five more over the remainder of the year, outpacing our forecast growth in imports in 2023 of ~15-20 bcm.
With that said, European regasification utilisation rates are expected to remain structurally higher than pre-invasion levels. This in part explains why the NWM – TTF spread on the forward curve, while lower in the spot than levels seen in 2022, remain above the long- term average, which in an unconstrained regime can be set by the marginal terminal variable costs.
This structural increase in European LNG imports and utilisation rates is a key focus for market participants – with strategic re-evaluations ongoing regarding European market access, both from a portfolio contracting perspective and the understanding of spot access, supported by the development of a liquid market to generate price signals and aid management of basis risk.
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