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Iran sanctions boost European gas prices, stall Tehran’s LNG push

The re-imposition of US economic sanctions against Iran has already had a bullish impact on oil prices, with Brent rising to a 3.5-year high above $77/b early Wednesday, a move that is having a knock-on effect on European spot gas and LNG pricing.

While Iran does not supply gas to Europe — it only exports small volumes to Turkey, Iraq and Turkmenistan — the worsening political sentiment following the move by US President Donald Trump to scrap the Iran nuclear deal is permeating the European gas sphere.

Both the key UK NBP and Dutch TTF gas hubs moved higher on Wednesday’s open, the NBP Winter 18 contract trading as high as 60.60 p/th after having been assessed by S&P Global Platts at an even 59 p/th Tuesday.

The last time the NBP Winter 18 contract was assessed above the 60 p/th mark was in late November 2014, S&P Global Platts price data showed, having been as low as 32.50 p/th in early 2016.

The TTF Winter 18 contract was trading at the Eur22/MWh mark, above the record high assessment for the contract of Eur21.40/MWh at the end of April and well above the Eur13.825/MWh assessment from January 2016.
LNG PRICING

A higher oil price will also filter through to oil-indexed LNG and Russian long-term contracts, resulting in higher prices, influencing European spot gas markets.

Oil prices have been on an upward trend since June 2017, accompanied by an increase in the price of long-term contract LNG. The boost to oil prices as a result of the US withdrawal means long-term contract LNG prices, which typically lag oil by three to six months, can expect further rises in coming months.

The price of spot LNG in Asia-Pacific has already risen from $7.05/MMBtu at end-March to $8.075/MMBtu May 8.

Strong demand for LNG over the winter, led by a surge in Chinese LNG imports, has left stocks low, maintaining demand in Asia for the fuel. European stocks also fell to very low levels over the winter, taking a late additional hit from extreme cold weather at the end of February.

While buyers may exercise tolerance clauses in long-term LNG contracts to maximise purchases on the cheaper spot market, demand for re-stocking may allow spot sellers to push prices up near to long-term contract levels, thereby avoiding any downward pricing pressure resulting from the reduction in post-winter gas burn as temperatures warm in the northern hemisphere.

The increase in Asian LNG prices will also make it the optimum target market for LNG, widening the spread with European hubs, which may also see prices pushed higher as European buyers eventually look to replenish depleted winter stocks.
LNG INVESTMENT IMPLICATIONS

Sanctions will again stem Iran’s nascent LNG ambitions, but may have significant regional impacts with international implications by bringing into question investment in Qatar’s North Field, which is linked to Iran’s South Pars.

Qatar lifted its moratorium on further development of the North field in April 2017, just over a year after sanctions on Iran were lifted in January 2016, as it became clear that Iran was ratcheting up development on its side, leveraging investment from foreign companies post-sanctions.

Qatar then announced it intended to raise its LNG production capacity from 77 million mt/year to 100 million mt/year by 2023. At the time the move was attributed to a desire to improve Qatar’s financial ratings as the government budget moved into deficit.

But the close timing of events with Iran’s increase in South Pars investment suggests some connection, driven by concern on both sides that gas and gas condensate could migrate between the linked reservoirs to the area where development was most intense.

Qatar has maintained better relations with Iran than other Arab Gulf states, one of the factors which led to Saudi Arabia, the UAE, Bahrain and Egypt cutting diplomatic and transport ties with the country in June 2017.

Some observers have argued that the Qatari moratorium was designed to assuage Iranian concerns over field development while it faced sanctions. With sanctions lifted, and Iranian investment in South Pars on the rise, Doha saw the way clear to renewed development.

Some observers expect to see a renewal of sanctions on Iran as potentially impacting Qatari decisions over the timing and extent of its new North Field development.

Given its size, this would in turn impact LNG investment decisions far and wide, not least in the US, where a new wave of LNG developers hope to export surplus gas from the Permian basin produced alongside the US’ booming shale oil output.
Source: Platts

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