2018 began with a tight LNG market, with NE Asian prices above 11 $/mmbtu and a huge amount of focus on Chinese buying. The JKM curve is in fairly sharp backwardation, with summer prices around 7.5 $/mmbtu, promising the usual summer price drop.
2018 should be another bumper year of supply in the market. 2018 will benefit from having a full year of the terminals which came online in late 2017 (4.5 Mtpa Sabine Pass 4, 5.1 Mtpa Yamal 1, 4.4 Mt Wheatstone 1), while another 34 Mt of new project capacity is due to join in 2018. Incremental LNG supply is expected to be similar to last year, at around 30 Mt y/y in 2018. A bumper December meant that much of the planned volume arrived in 2017. There is some downside potential for the 2018 number, with a 25–30 Mt y/y increment likely after accounting for expected delays.
The key feature of 2017 was probably the strength in Chinese demand, which helped keep oversupply at bay. Over 2017, Chinese incremental LNG demand was around 11.5 Mt y/y. Those numbers are eye-watering and fundamentally challenges our long-held view of a sustained period of oversupply in the LNG markets. The big question for 2018 is whether that incremental growth of around 10 Mt y/y is going to be sustainable into 2018 and 2019. We think it is, with Chinese draws on LNG in 2018 likely to be around the 9.5 Mt level.
While China is tightening the market at a rate faster than expected, it is still unlikely to result in a wave of FIDs this year or even in 2019. Given we are at the start of 2018, an FID this year paves the way for gas from 2023. While there is action on the horizon, we still do not expect a lot of projects to be getting financing this year. Of the ones that are most likely, more details on Qatari supply projects are expected and, at the very least, the debottlenecking project there should get the green light. Lots of US projects are competing to go ahead, but of the 58 Mtpa of capacity in those projects, we would be surprised to see more than about 10 Mtpa get a FID this year. Outside of that, it is still going to be hard to get enough offtakers to sanction big, expensive projects.
Over the second half of 2017, freight rates for spot cargoes more than doubled, going from a daily rate of 37,000 $/day in July to 82,500 $/day in late January. The change in fortunes for LNG shipping came from growing demand for tonnage. A total of 29 Mtpa of new supply in 2017 supported some fairly mileage-heavy supply, particularly European reloads. Also, the newbuild delivery schedule has not been as busy as originally planned, due in part to a large number of vessels seeing delayed completion dates. Only 37 of the 57 vessels scheduled to be completed in 2017 actually were completed, which now means that 2018 is scheduled to see 62 LNG carriers being delivered, a new annual delivery record if achieved. If all of those vessels come online, some downward pressure on freight rates will reappear.
For summer 2018, the big question is how low could prices fall when seasonal demand ebbs. We think the most relevant pricing point is the TTF Sum-18 delivery contract, which we put around 16.6 €/MWh ($/mmbtu). That suggests, at the very least, that those summer Asian LNG prices are likely to drop by 1 $/mmbtu from the current 7+ $/mmbtu level. The summer balances still hint that the Pacific Basin will need Qatari spot. The NE Asian markets should stay at a premium to the TTF, but that premium does not need to be very high to entice supply east.