It was an eventful September, with the Atlantic hurricane season affecting both sides of the LNG supply and demand balance. Contract renegotiations and a sudden flurry of new deals also dominated headlines. Against this backdrop, LNG prices for delivery into November continued to gain, hitting 7.6 $/mmbtu as participants looked to ensure they would have sufficient cargoes coming in during November.
On the cusp of winter, all eyes in the market are on Chinese demand. China is having an incredible year of incremental takes, as the government policy of closing old coal-fired boilers in urban areas is leading to a structural increase in gas demand. Chinese LNG imports were up by 6.7 Mt y/y (44%) over January-August, with the urban gas sector demand up by 15% y/y to over 17 bcm.
The growing res-com demand in cities is predominantly for heating load, and therefore a big chunk of this incremental Chinese demand will be weather-sensitive. This sensitivity has led the gas majors to issue a gas shortage warning for the coming winter, estimating that China could have a shortage of 5 bcm. Add in central government orders for cities in the Beijing-Tianjin-Hebei region to cut particulate matter pollution this winter and a reduction in city-gate industrial prices in September by around 5%, and Chinese demand will be strong this winter. With coal also looking in short supply, energy will be at a premium this winter.
While most developments are supporting the outlook for Chinese LNG takes, the main downside risks come from higher hydro levels and forecasts of a more moderate Q4 17. We have Chinese takes over the Q4 17 and Q1 18 period up by 3.6 Mt (22%), although weather risks could swell that by another 3 Mt or so, taking those volumes away from Europe.
South Korean demand has been the other significant demand story this year (up by more than 4.3 Mt y/y over the year to August), counter to expectations of a y/y fall. Imports have been driven by imports through non-KOGAS import terminals and by apparent stockbuilds given new KOGAS LNG storage capacity. We think this run of y/y increases could be nearing an end as stocks are now high, the non-KOGAS terminals have been running with high utilisation, much more nuclear power supply is expected to be online y/y, and new coal-fired capacity is set to crowd out gas in the power sector (see Insight: Korea – changing direction, September 2017).
On the supply side, the first 4.4 Mtpa train at Wheatstone was expected to produce its first LNG in September, but that appears to have slipped to at least October. Meanwhile, the 4.5 Mtpa Sabine Pass Train 4 is having a more successful commissioning run and should be operational in October, while Dominion’s 5.3 Mtpa Cove Point in Maryland, US, the 2.2 Mtpa Cameroon (Hilli FLNG), and Novatek’s 5.5 Mtpa Yamal Train 1 in Russia are all confirmed starts before year-end.
Despite ongoing softness at Henry Hub, TTF prices have risen on high coal prices, stockbuilds, persistent French nuclear outages, and unseasonably cold weather. The ramp-up in NE Asian prices has even been outpacing those TTF gains as Chinese buyers have been securing cargoes for November. With weather risk still high, we expect NE Asian prices to stay at these elevated levels above 7 $/mmbtu in Q4 17. If that quarter is milder in NE Asia and Europe, then some downward repricing in Q1 18 should be expected.