After the rumpus caused by the combination of higher demand and disrupted supply at the end of 2016, the expected price correction has arrived. JKM prices that had surged above 9 $/mmbtu in Northeast Asia and southern Europe, before dropping back a couple of dollars in late January, have fallen further in February.
The price correction was hastened by milder weather and added supply from the restarted first train at Gorgon. With spot LNG into Asia now put around 6.4 $/mmbtu, prices are easing back to levels more in line with our expectations going into winter. Still, we are bearish.
Incremental supply in 2017 is expected to be around 33 Mt, coming both from new trains and those that started over the course of 2016. Most of the new trains will come online in H2 17 and will add 14.9 Mt to supply. There is even a bit of upside to those numbers, with Chevron already talking about Gorgon Train 3 being commissioned and starting exports from Q2 17, which would be a few months earlier on the July 2017 guidance previously given.
The projects most at risk to the supply forecasts are the first Wheatstone train (4.4 Mtpa) and the first Ichthys train (4.2 Mtpa)—both due in July. If these projects see the same five-month average delay as the 2016 trains, about 4.8 Mt would be lost from the 2017 supply forecasts.
While supply has its risks, so does demand. China will be the country to watch most carefully. In 2016, Chinese demand expanded by over 6 Mt, with almost all of that growth coming in H2 16. This corresponded with an increase in Australian LNG production (where China has contracted gas), and more supportive demand, which was driven by a hot summer with low hydro levels, a spike in domestic coal prices, some basis effects on the competitiveness of gas vis-à-vis LPG, and colder temperatures in Q4 16. Such an array of supportive factors is not likely to appear again this year, but we still expect a healthy 4 Mt increase.
Pakistan is the country making the most noise on the demand side, announcing two tenders and a desire to have five LNG terminals operational by the start of 2019, including two private terminals. Given it currently has one 3.8 Mtpa FSRU operating and has only contracted for one other, which is expected to go into operation in June this year, that is incredibly optimistic.
While supply will continue to be strong and Asian demand will ebb and flow, the key price drivers seem to be indicating that the market will move down towards the 5 $/mmbtu level. A month ago it seemed implausible that US Henry Hub prices would average around 2.5 $/mmbtu in the summer, but that now cannot be discounted. At that price level, the arb between Henry Hub and Northeast Asia is going to close around the 5 $/mmbtu level for LNG. So, there appears to be a natural impetus driving the market towards stabilising at that level, which is low enough to close the Henry Hub arb with Asia but keep it wide open in the Atlantic basin.
The second driver is that a mild February has helped take a little sting out of the European market and has pushed Q2 17 / Q3 17 prices back down towards 5.5 $/mmbtu. As the Asian winter fades, prices there will track down towards parity with those in Europe. As the heating season ends, those NE Asian prices could drop back and we expect to see summer prices closer to 5 $/mmbtu—the level to which the global market is being pushed.