Europe Stockpiling Low Cost, Surplus LNG

Demand from top Asian buyers drops sharply; Asian, European gas price spreads converge. Europe set to becoming dumping ground for LNG.

Europe is set to become a dumping ground for the world's unwanted gas supplies this winter as Asian demand for sea-borne shipments fizzles out, leaving dealers to seek out willing buyers at rock bottom prices.

Caught in a sharp downward spiral, Asian spot prices for liquefied natural gas (LNGLF) (LNG) have more than halved this year as top Japanese and South Korean buyers, sitting on high stocks, scale back purchases while falling oil prices add to woes.

Lower prices have gouged producer profits and hollowed out Asian markets at least until February, with Europe now the destination of choice for uncommitted supply, some traders and analysts say.

"The LNG industry was focusing on Asia but that time is more or less over now. The focus will be more spread all over the world and so LNG will be back in Europe," Philippe Perfumo, deputy head of long-term gas at GDF Suez said in Paris this week.

At four-year lows beneath $10 per million British thermal units (mmBtu) for December delivery, LNG prices are converging with European pipeline prices at around $8.50/mmBtu, aligning two of the most important price benchmarks for the first time since Japan's Fukushima nuclear disaster set spot LNG prices rising in March 2011.

"There is no global LNG spot market right now, there's just lots of supply and no demand," a trading source at an Asia-Pacific producer said, explaining the sharp downward moves.

DRY MARKET

Three of the world's biggest LNG buyers, Korea Gas Corp., Tokyo Electric Power and Chubu Electric, have withdrawn from spot LNG markets as ample reserves left from the previous mild winter cater for current needs.

Traders see LNG at $8 per mmBtu as achievable as mild weather forecasts dampen Asian demand and weak oil adds pressure to spot LNG prices as long-term, oil-linked LNG deliveries become more competitive.

A four-cargo sell tender from Australia's North West Shelf export plant closing on Monday may struggle to attract Asian buyers, as could Nigerian efforts to sell a single cargo loading next month, sources said.

Far Eastern buyers say high stock levels leave little space for storing new cargoes, with South Korean stocks 75 percent full in July versus 57 percent a year ago, Reuters data shows.

Asia's eroded premium means it is now more profitable to send LNG produced in Nigeria or Trinidad and Algeria towards Europe than it is to sell to Japan, whose gas hubs cannot easily absorb the intake.

France is set to receive 16 cargoes this month, up 44 percent versus a year ago, drawn from Trinidad, Nigeria and Qatar, while Turkey also upped November spot purchases to three, data shows.

Britain may see the biggest supply uptick from top producer Qatar, while Europe could even start pulling in Australian supplies if Asian prices continue falling, reversing trade flow trends established after Fukushima.

Oversupply began this summer, forcing traders to store cargoes on tankers and at terminals with the intention of re-selling them once demand and prices rose.

But with prices continuing to fall worldwide, LNG stored in Spanish, Belgium and Dutch terminals could force traders to release the supply into local gas grids at a loss.

"The traders who wanted to export these cargoes bought them in August or September, when prices were much higher, meaning substantial losses even if you don't count the three months of storage costs," a European trader said.

By Oleg Vukmanovic