All eyes east

Published at 14:25 31 Oct 2017 by

After a few weeks of stability in LNG prices, those for December and January delivery into Northeast Asia once again started rising, passing 9.0 $/mmbtu as participants booked sufficient cargoes for peak winter demand.

All eyes remain firmly on demand in China, which is having an incredible year of incremental LNG takes, as the government policy of closing old coal-fired boilers in urban areas is driving a structural increase in gas demand. Chinese LNG imports were 7.5 Mt (46%) y/y higher over January-September, with underlying demand from the gas sector up by almost 23 bcm (18%) y/y over January-August. It thus seems increasingly unlikely that the y/y levels of growth are likely to ease over the next six months (see this month’s LNG Insight: China – propping up LNG, October 2017). While the exact level of takes will depend on how cold winter gets, at least one set of seasonal weather forecasts suggest that temperatures will be warmer than normal. Aside from heating demand, underlying industrial demand growth still points to a very big take from China over the coming winter months—we forecast 6–7 Mt more y/y in the current winter period. 

Outside of China, demand looks less resilient in Northeast Asia if the winter is mild. Japanese LNG demand is already under pressure given higher levels of nuclear availability, and there is a chance that another three reactors could be switched on this winter. LNG demand in Japan will be lower if there is less peak demand for heating than last year. In South Korea—one of this year’s other demand surprises—some upside remains from volumes through the non-KOGAS terminals, while gas demand will be pressured by new coal-fired plants. Nuclear outages are surprisingly high—only 1 GW less than last year—but we think that this gap will be bigger in November and December by 2-3 GW.

South Asia should also take more volumes, with some recent tenders suggesting a greater willingness from India to shell out for LNG than previously. How sustainable this is beyond the immediate winter, given Indian demand is currently being buoyed by a very tight power market due to low coal inventories at its power stations, remains to be seen. Still, expect India to take delivery of Gorgon LNG volumes under contract, thus taking imports up y/y.

On the supply side, mid-October saw the first 4.4 Mtpa train started up at Wheatstone, where a ramp up during the rest of Q4 17 is now expected. The 4.5 Mtpa Sabine Pass Train 4 is now operational and spot cargoes are being marketed there, while Dominion’s 5.3 Mtpa Cove Point project has started producing LNG and Novatek’s 5.5 Mtpa Yamal Train 1 in Russia is to be putting two cargoes on the water in November and another four in December.

Balances look generally tight for Q4 17, so much so that the reload market from Europe is back in business. The Q1 18 market looks looser on a normal-weather basis, as the supply coming online this quarter should be ramped up and buyers will be looking only for late-winter cargoes. A mild Q4 17 could mean NE Asian stocks will still be pretty healthy given apparent buying in Q4, and a drop in prices from February or so could well be on the cards.

For the coming summer, Chinese demand will likely keep the NW Europe arb with the US open, but with some pressure to close in Q3 18. Again, the arb window should be open for the following winter, before needing to close for the last three quarters of 2019.  All in all, this winter will be a high point for prices, but expect a cooling down over summer prices back towards 5 $/mmbtu.

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