Brexit’s impact on LNG prices

A quick blog on how the UK vote to leave the EU — known as Brexit — is affecting LNG prices.

Since the start-up of new LNG production over the past two years in Australia, the US and Papua New Guinea, global gas prices have become more interlinked than ever.

This is because of the LNG glut, which has led to a rise in uncommitted cargoes. These are cargoes that have not already been contracted to a customer, and are offered to the spot market first, but will go to the UK NBP gas hub if no-one wants them.

So, before Indian and Japanese importers buy spot LNG, they look at NBP prices, because if the sellers cannot sell to them, they will probably have to take the supply to the UK and sell at the NBP.

The NBP is priced in pounds (in pence, actually), while LNG is priced in dollars.

After the UK vote last week to leave the EU, the pound dropped against the dollar.

How has this affected the NBP in dollar terms?  Like this:

When the pound and dollar were pretty stable over the past two months, the NBP in pounds and the NBP in dollars were moving pretty much in tandem.

But, since last Friday, we can see how the huge change in exchange rates has resulted in a bigger dip in LNG dollar terms and a divergence.

If the pound continues to fall, then a number of things could happen:

  • Global gas and LNG prices will fall, because they use the NBP as a reference.
  • The UK will have to pay more to import LNG, because imported LNG is paid in dollars.
  • US LNG export facilities are more likely to be idled, because it is not worth shipping to the UK because of lower NBP prices.

LNG traders are bracing themselves for a period of uncertainty. But as with the Brexit process, the only known thing is that there are many unknowns — so high levels of volatility are expected in the coming weeks and months.

3 thoughts on “Brexit’s impact on LNG prices

  1. Hi Zach,

    Thanks for your comment.

    The main point about the global impact is that LNG traders in main parts of the world, including Asia, use NBP as a reference for spot trading.

    So for example, before Brexit, say UK NBP price is £2/mn Btu and the exchange rate is £1=$1.50. Then in US dollars, this is $3/mn Btu.

    After Brexit, the pound drops. Say the rate is now £1 = $1.25. Even if NBP is flat at £2/mn Btu, in dollar terms it is $2.50/mn Btu.

    So if an Indian/Japanese/Chinese buyer is bidding for an LNG spot cargo at NBP plus $1/mn Btu, you can see that the bids has now dropped by 50c. This is how it can affect the global LNG market.

    The point about US export terminals being idled: There needs to be a spread large enough between the US fob price and delivered price, otherwise US exporters will idle production. The UK (and Europe) is likely the market of last resort for US LNG. If UK (and Europe) gas prices falls enough in US dollar terms so the spread is not large enough to make US exports worth it, then US export plants could be idled.

    Does that make sense? I’d be interested to hear if you have a different view. Thanks.

    Kwok

  2. I think that LNG prices, whether quoted in dollars, Euros or GBP are linked to dollar terms. Oil and LNG are traded in USD; Russian gas is priced in USD. That means to me that the weakness of the pound vs the USD will result in Brits paying more for energy, but the global markets will see limited impact.
    I am not sure how you reach the conclusion that “US LNG export facilities are more likely to be idled…” No US LNG has yet to make it to the UK. In fact, there have been two exports from Sabine Pass that went to Europe: both to the Iberian Peninsula. That is basically isolated, gas-wise, from the rest of Europe. Therefore, they have had no impact on western European gas prices, flows or imports from elsewhere.

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