Introduction
On February 28, the sudden closure of the Strait of Hormuz sent shockwaves through global energy markets, causing liquefied natural gas (LNG) prices in Europe and Asia to soar while US benchmark prices remained relatively stable. Understanding this divergence is essential for energy traders, investors, and policy analysts. This step-by-step guide walks you through the factors behind the price spike, how to track the divergence, and what it means for future markets. By the end, you'll be able to explain why European and Asian LNG benchmarks detached from US levels and how to monitor similar geopolitical disruptions.
What You Need
- Basic familiarity with natural gas and LNG markets
- Access to real-time or historical futures prices (e.g., from trading platforms, EIA, or ICE)
- Understanding of key benchmarks: TTF (Europe), JKM (Asia), Henry Hub (US)
- Knowledge of global chokepoints and shipping routes
- Optional: spreadsheet or data visualization tool for comparison
Step-by-Step Guide
Step 1: Understand the Strategic Importance of the Strait of Hormuz
The Strait of Hormuz, located between the Persian Gulf and the Gulf of Oman, is a narrow chokepoint through which about 20% of the world's LNG and nearly 30% of all seaborne oil pass. Its closure—whether due to military conflict, geopolitical tensions, or accidents—disrupts global supply chains. In this case, the February 28 closure forced LNG tankers to take longer routes around Africa via the Cape of Good Hope, adding days to transit times and significantly raising shipping costs. Recognize that any disruption here affects supply to European and Asian markets far more than to the US, which is largely self-sufficient in natural gas.
Step 2: Identify Regional Benchmark Prices
To analyze divergence, you must track three regional benchmarks:
- TTF (Title Transfer Facility) – The Dutch gas hub price that serves as Europe's benchmark. After the closure, futures for TTF delivery surged to $14.80 per million British thermal units (MMBtu).
- JKM (Japan Korea Marker) – The Asian benchmark, which also rose sharply due to increased shipping costs and competition for spot cargoes.
- Henry Hub – The US benchmark, which remained relatively flat because domestic production and pipeline infrastructure insulate the US market from global shipping disruptions.
Record these prices before and after the closure date to see the divergence pattern.
Step 3: Observe the Price Divergence Over Time
Plot the TTF and JKM prices against Henry Hub from late February onward. Note that while US prices held steady around $2.30–$2.60/MMBtu, European and Asian prices climbed rapidly. The divergence reflects not just the immediate supply shock but also the market's expectation of prolonged disruption. Use a daily or weekly chart to visualize the gap widening.
Step 4: Analyze Supply-Side Factors Behind the Divergence
Several supply-side elements contributed:
- Shipping re-routing: Tankers forced to avoid Hormuz added 6–10 days to voyages, reducing effective fleet capacity and raising spot freight rates.
- Increased shipping costs: Charter rates for LNG carriers spiked, passing through to delivered prices in Europe and Asia.
- Loss of cargoes from Qatar, UAE, and Iran: These major LNG exporters rely on the Strait for shipments to Europe and Asia. The closure halted or delayed those flows.
- US supply independence: The US, with its own abundant shale gas, was largely unaffected, keeping Henry Hub stable.
Step 5: Examine Demand-Side Reactions
Assess how buyers responded:
- European buyers scrambled for alternative supplies, bidding up TTF futures.
- Asian buyers competed for spot cargoes that could still reach them via longer routes, pushing JKM higher.
- US buyers had little incentive to change behavior given low prices and ample domestic supply.
This demand asymmetry amplified the regional price differences.
Step 6: Monitor Geopolitical Developments and Reopening Prospects
The price divergence will likely persist until the Strait reopens. Track news on diplomatic negotiations, naval exercises, or security guarantees. Once the chokepoint is cleared, shipping routes normalize, freight costs drop, and prices should converge again—though the pace depends on how quickly inventories replenish and outstanding contracts are fulfilled.
Tips for a Thorough Analysis
- Always compare prices on a delivered basis (including shipping) rather than just spot futures.
- Use data from reputable sources: ICE, EIA, Bloomberg, or Platts for accurate benchmark quotes.
- Look at the spread between TTF/JKM and Henry Hub to quantify divergence magnitude.
- Check the LNG shipping fleet status – any idling or rerouting of vessels can be a leading indicator.
- Be aware that other factors (seasonal demand, storage levels) can also influence prices; isolate the closure effect by controlling for those variables.
- Remember that the US is not entirely insulated; a prolonged disruption could eventually affect global LNG supply availability for US exports, but the domestic price impact is minimal.
- For traders: consider using options or futures to hedge against further divergence until the situation stabilizes.
By following these steps, you can gain a clear, data-driven understanding of how the Strait of Hormuz closure has reshaped LNG pricing dynamics worldwide.