The upward price spike seen in December 2016 and January is long gone, and prices have started to meander downwards as the market eases towards the end of the heating season. While the February downward correction was quite sharp, March has seen a more gradual but consistent drop to below 6 $/mmbtu. As last month, we still feel directionally that prices will ease further.
Incremental supply in 2017 is expected to be around 34 Mt, coming both from new trains and those that started over the course of 2016. The incremental supply (in y/y terms) should be less affected by delays, although that is not to say there is no risk. The reason for this is that the bulk of incremental volumes will come from full-year production at the projects that came online in 2016. Also, two trains have moved forward this year, with Sabine Pass Train 3 looking to go to commercial operation imminently and Gorgon Train 3 starting to commission. After that, there is only Wheatstone Train 1 that is likely to start up before Q4 17, and the company guidance still suggests that will be on line for mid-year, which we interpret as July. Almost all other trains (Ichthys 1, Yamal 1, Prelude) are now looking like year-end start-ups.
A particular risk for the level of market supply going forward could come from increasing scrutiny of Australian LNG exports following the high incidence of blackouts in Southern Australia over recent months. Though these have largely been due to specific regional power issues, plus some very high power demand from hot summer weather, the disruption has brought exports from Queensland’s LNG projects into focus. While gas pipeline constraints between Queensland and South Australia mean current exports were not in any way at fault, the lack of ability to move the gas to where it was needed domestically raises the possibility that future Australian gas demand could compete more directly with exports—assuming investment in either pipelines or FSRUs. At the very least, the idea that Australia could turn to being an LNG user itself has become increasingly probable, although this is unlikely to occur before 2019. Even then, Australia will be a significant net exporter given the limited size of the Australian domestic gas production.
Also interesting is that flat domestic production and a drop in gas imports has seen Chinese LNG imports running a little ahead of where we expected them to be. In particular, Turkmen volumes were flat in February, and a reduction in other imports continued to create room for LNG. While some of this likely reflected locational issues, given winter demand was focused in the northeastern coastal region, where there is little in the way of gas storage, it certainly went against the relative pricing dynamics that have pipeline imports continuing to hold a discount to LNG.
The early onset of the European spring means European markets are looking more relaxed than they were, and with evidence that LNG is finally beginning to return to the region, prices have started to fall faster. Nearing the end of March, the summer contracts at the TTF were at 15 €/MWh, putting European hubs down at the 4.75 $/t level. At this level of pricing, the Henry Hub–TTF arbitrage window stays open. However, we expect Northeast Asian LNG prices to follow the TTF down closely and promptly close the Henry–JKM arbitrage window, which needs to be priced above 5 $/mmbtu. With South Asia also following those European prices down, US LNG is effectively locked into the Atlantic basin (chasing demand West of Suez and East of Panama). We expect global LNG prices to show some resistance to dropping much below 4.5 $/mmbtu over the summer.