Europe more exposed to LNG price fluctuations than East Asia – Rystad Energy

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BAKU, Azerbaijan, October 26. The average price of liquefied natural gas (LNG) in Europe rose by 47%, while in East Asia, long-term contracts pegged to oil prices increased by approximately 28%, enabling the region to better cope with supply disruptions.

This was reported in a statement by Rystad Energy.

According to the company’s research, 82% of long-term LNG contracts in East Asia are linked to oil prices, which have risen significantly less than spot market LNG prices. It is noted that, at the same time, the cost of contracts linked to gas hubs and spot prices has increased by 72%.

"In Europe, about 65% of LNG is purchased on the spot market, while roughly a quarter of long-term contracts are linked to gas price indices. This procurement structure makes the region more vulnerable to market fluctuations.

Reliance on the spot market to meet the remaining demand for gas creates strategic risks. Delaying the conclusion of long-term contracts until viable alternatives emerge could lead to additional costs if gas must be purchased at higher market prices. Contract terms and the supply volumes stipulated therein must align with sustained demand, and supply sources and routes must be diversified,” the company stated.

Rystad Energy also emphasizes that linking prices to the U.S. Henry Hub index and the choice of supply routes help mitigate various types of risks: “Shipments from the U.S. Gulf Coast to Europe do not pass through the Strait of Hormuz, whereas shipments to Asia may face restrictions at the Panama Canal or require longer alternative routes. In this regard, Australia and Canada could become important alternative sources of supply for Asia.”

"In addition, importers are advised to carefully review contract terms regarding obligations to replace undelivered LNG shipments and the option to select alternative sources of raw materials in the event of disruptions.

The expansion of natural gas liquefaction capacity in the U.S. creates additional opportunities to enter into Henry Hub-indexed contracts and diversify price risks. However, increased gas demand from LNG plants, coupled with demand from the power sector, may support prices in the U.S. market even as the expansion of global LNG production capacity contributes to lower spot prices in Asia and at the Dutch TTF hub,” the company reports.

In this regard, Rystad Energy believes that importers should assess whether the price advantage of Henry Hub-linked contracts will persist throughout their entire term, rather than assuming that the current price differential will remain unchanged.