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.