How natural gas traders hit the jackpot
The LNG frenzy is fueled by a combination of crises that hit Europe in one fell swoop.
As the war in Ukraine rages, Russia has slowly reduced its gas exports to the continent after the imposition of Western sanctions.
Meanwhile, the French fleet of nuclear reactors is weakened by technical problems and the reservoirs supplying the Norwegian hydroelectric power stations are running out, creating an even greater demand for gas to be burned in the power stations.
With Europe’s native gas producers operating at full capacity, this means LNG from abroad is needed to fill the void.
Alex Froley, LNG analyst at Independent Commodity Intelligence Services, estimates that a typical tanker with a capacity of 150,000 cubic meters of supercooled gas could now fetch around £190 million for its cargo.
Nearly £150million will likely be profit.
“These are all-time highs for global spot gas prices, well above anything we’ve seen in the past 20 years,” he adds.
“We have seen ships waiting offshore in Europe for a few weeks before delivering, rather than entering directly.
“They may be hoping to find slots to deliver to the more expensive markets, such as the Netherlands, rather than wanting to deliver immediately to the UK or Spain, where prices are lower.”
The result of exorbitant prices in European spot markets, where gas was selling for €292 per megawatt-hour on Wednesday compared to just €45 a year earlier, has been a flurry of frantic haggling.
LNG is normally traded on long-term contracts at prices that are typically well below day-ahead rates, especially in the current environment.
But the huge difference between those agreed fees and current prices has in some cases prompted traders and suppliers to simply pay breakage fees so they can sell their cargoes to the highest bidder, Investec’s Piper says.
In other cases, traders have negotiated lucrative deals with the original buyer to sell gas that is owed to them but not necessarily needed at the moment and pocket the difference – traders also getting a part of the action.
“Even by breaking the contract, you can still make a lot of money – and that’s what these traders do,” adds Piper.
It has placed holders of long-term contracts in a very favorable position.
“If you bought that cheap LNG, you’re the one now making money,” says Laurent Segalen, energy investment banker and host of the Redefining Energy podcast.
“And the prices paid are beyond anyone’s comprehension. It’s crazy.”
Jean-Christian Heintz, a former LNG trader who now works as a consultant, says, “It’s a time when you’re very happy to have long-lived assets.”