A cargo does not move between oceans because a price is higher somewhere else. It moves because the arithmetic, worked all the way through, says it is worth more there once everything the move costs has been subtracted.
The calculation
Netback is the value of a cargo at its point of origin once the cost of getting it to a given destination — chiefly shipping, but also port and canal charges where relevant — is subtracted from that destination’s sale price. A trader deciding where to send a flexible cargo compares the netback achievable in every plausible market, not the headline sale price in each, because a higher sale price in a further or more expensive-to-reach market can easily net back to less than a lower price somewhere closer.
Arbitrage happens when this comparison favours redirecting a cargo from where it was originally headed to somewhere else entirely — most visibly, moving a cargo that would ordinarily have served one ocean basin into another where the netback is now higher.
Basis: the number that actually matters
Traders do not watch JKM or TTF in isolation so much as they watch the basis — the price difference between the two — because it is the gap, not either level individually, that determines whether an arbitrage trade clears. A basis wide enough to exceed shipping cost between the two regions makes redirection profitable; a narrow basis does not, regardless of whether both benchmarks happen to be historically high or low in absolute terms at the time.
This is why market commentary about LNG arbitrage typically discusses the spread between regions rather than either region’s price alone — the spread is the tradable quantity.
What stops the gap closing instantly
A sufficiently wide basis does not translate into an immediate, complete correction, for reasons that are entirely practical rather than theoretical.
Ships have to be available. A cargo cannot redirect itself; a vessel has to be free, positioned appropriately, and willing to take the diverted route, and the LNG fleet is not large enough to make this instant or costless.
The trade has to still work after shipping responds. A wave of cargoes chasing the same arbitrage opportunity increases demand for vessels on that route, which raises freight rates, which erodes the netback advantage that motivated the trades — arbitrage activity itself works against the size of the opportunity that created it, up to the point where the remaining basis no longer clears the now-higher shipping cost.
Contracts have to permit it. A cargo still carrying a destination restriction cannot be redirected regardless of how attractive the netback looks, which is exactly why the shift toward destination-flexible contracts has made arbitrage a larger and more responsive part of the market than it once was.
Timing has to align. A cargo already loaded and en route toward one market has limited ability to change course cheaply partway through a voyage, so arbitrage is generally decided before or very shortly after loading rather than mid-ocean.
Why this links markets that otherwise look separate
Because arbitrage responds to the basis between regions, a persistent shift in one region’s supply or demand shows up, with a lag and subject to the frictions above, as a price effect in every other region a sufficiently wide basis would attract cargoes from. A sustained increase in Asian demand, for instance, widens the basis against other regions, pulls flexible cargoes toward Asia, and in doing so tightens supply — and firms prices — in whichever regions those cargoes would otherwise have served.
This is the mechanism, rather than any formal coordination, by which the world’s regional LNG markets behave as loosely connected rather than fully independent — connected enough that a shock in one place is rarely contained entirely to that place, and independent enough that the connection takes real time and hits real limits rather than operating instantaneously.
What this means for reading the industry
Arbitrage explains why supply and demand events in one part of the world regularly appear in commentary about a completely different region’s prices, and it is the reason destination flexibility and shipping availability — both covered elsewhere in this track — matter as much to how the market actually functions as the underlying supply and demand fundamentals themselves.