June has been a tumultuous month for gas markets, but Northeast Asian LNG prices remain stuck in the 5–6 $/mmbtu range where they have lingered since the end of February. While global gas price movements were far from spectacular, market events were anything but dull.
The big one was the diplomatic isolation of Qatar by a number of other Arab states, led by Saudi Arabia, that accuse Qatar of supporting terrorism. While the crisis appears to have at least stopped escalating and Qatari LNG exports have yet to be materially affected, some form of future escalation cannot be ruled out. Certainly, any disruption of exports from Qatar would take the LNG market to a whole new level of geopolitical risk and global LNG prices would roof.
For a market facing an often-mentioned glut, supply has its own inertia, and we saw a first FID for a while as Eni managed to connect all the dots and sanction its 3.4 Mtpa Coral FLNG project off the coast of Mozambique. Being an FSRU rather than an onshore terminal, the project is at the lower end of the cost spectrum, and it has also benefitted from backing by ExxonMobil (buying equity in associated fields) and BP (an offtake agreement). While a big achievement, this has the feel of an outlier rather than the start of a trend.
A number of demand events were important in June. A few were reasonably bullish, with China leading the way with eye-watering y/y import growth of 1.5 Mt that made it much more likely that the y/y increment in Chinese imports will come in close to last year’s levels around 6.5 Mt. The usual explanations for high gas demand (weather and power) seem a bit inadequate for such a large gain in a shoulder month. One explanation could be that new storage facilities under construction are filling with cushion gas. In particular, the 10 bcm storage facility being built by Sinopec in Henan, scheduled for operations in May 2018, could be starting to fill with cushion gas as the company will not want to be filling the site during the winter months. However, with no confirmation from the company, this is just a theory.
With South Korean and Japanese numbers both still stronger than expectations, our Northeast Asian demand outlook has been revised upwards, though largely on Chinese numbers. The main downside revision to the outlook was Egypt, where the government has said it wants to halve LNG imports by the end of 2017 and stop importing altogether by 2018. Even taking that into account, 2018 looks stronger than it did on the back of Asian takes.
Stronger demand in Asia out through to 2018 means that more North American gas will be able to be sold into the market before Europe reaches the upper limits of its capacity to absorb imports. In turn, this means the arb between North America and Europe will need to stay open in 2018 to allow US exports to grow by 7.4 Mt y/y, which is less than full capacity but still much better than in some of our previous forecasts.
With those upward revisions to Chinese demand, our LNG price forecasts for 2017 have changed. For Q3 17, Northeast Asian prices will average around 5.5 $/mmbtu, up from our previous forecasts of 5.0 $/mmbtu. For 2018, global prices will be sustained around the 4.4 $/mmbtu, up from 4.1 $/mmbtu. We remain bearish as we still expect the US arbs will need to close to Asia and narrow with Europe.