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Commodity Traders Find Huge Arbitrage Opportunity As LNG Ships Head For Europe

Tyler Durden's Photo
by Tyler Durden
Wednesday, Dec 22, 2021 - 07:45 AM

A breakneck rally in European natural gas prices continued Tuesday, catapulting the benchmark to a new record high with premiums above Asia and the U.S. and creating massive arbitrage opportunities for U.S. liquefied natural gas (LNG) traders.  

Commodity traders with uncommitted LNG cargos from the Atlantic basin headed to Asia via LNG carriers are changing their routes to supply European customers willing to pay a hefty premium. 

Dutch front-month futures gained 33.55 euros/MMBtu over the prior day to close at 182.30 euros, a new record high

The rally in European natgas has gone parabolic in recent weeks following Russia's Gazprom PJSC's controversial Nord Stream 2 pipeline had its certification delayed until July, Russian gas flows to the continent plunged, France's nuclear power output slumping, Germany's wind output declining, persistent cold weather, Europe's overall gas supplies at unseasonably low levels, and mounting geopolitical concerns on the Russia/Ukraine border

The spread between European and U.S. natgas prices is at a blistering 52/MMBtu, well above its 15-year range. To put this in context, natgas markets in Europe are stretched while ones in the U.S. are well supplied. This makes the perfect opportunity for traders to source cargos in the U.S. on the Henry Hub-linked index and schedule passage to Europe. If one can find an LNG carrier, the arb trade will print money. 

"Soaring spot gas prices in Europe are prompting some rare cargo movements," said Alex Froley, an analyst at research consultancy ICIS, which tracks LNG tankers.

In recent weeks, US LNG vessels bound for Asia have deviated from their planned routes to Europe. This occurred on several occasions. Froley said a US LNG tanker called Minerva Chios was near India on Dec. 15 and turned around for delivery in Europe. 

Another US LNG vessel turned around near the Malacca Strait while an Australian LNG vessel began a rare journey to Barcelona. 

"This is believed to be the first Australian LNG into Europe since 2009, when there were a couple of Australian cargoes to the U.K. and France," he added.

Torbjorn Tornqvist, the founder and chief executive of Gunvor, the world's biggest independent LNG trader, said on top of normal LNG flows to Europe, there will be 15 to 20 additional vessels arriving in Europe this month and next. 

"Europe is clearly pricing itself to attract a lot of LNG and it needs it," Tornqvist said. "Without that, the supply situation could be very serious depending on the weather. Stocks are already low and will be exceptionally low by the end of the winter."

Goldman Sachs commodity analyst Samantha Dart shows how LNG shipments to Europe have accelerated versus Asia. 

High charter rates don't matter to traders taking advantage of this crazy arb trade printing like an ATM.  

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