So far in 2018, the LNG market has seen some tightness, with Northeast Asian prices for March delivery expiring above 10 $/mmbtu. The cold January and first half of February in NE Asia is likely to keep demand in the next few weeks and months high as China and Korea will want to top up storage levels that fell to help meet the winter’s high res-com demand. Q2 18 pricing is showing the expected seasonal declines, with summer contracts trading just above 7.0 $/mmbtu.
Despite this, double-digit prices over the winter seem to have soothed nerves about any potential market oversupply with a number of project developers in February touting that they will secure an FID in the next year or so. These included Anadarko’s 12 Mtpa Mozambique project, Cheniere’s 4.5 Mtpa Train 3 at Corpus Christi, ExxonMobil/Total’s plans to add 8 Mtpa at the PNG LNG facility, Gazprom’s 5.4 Mtpa Train 3 at Sakhalin-2, and the FLNG project offshore Mauritania and Senegal proposed by BP/Kosmos Energy. All of that was just in February, and these projects alone could add another 35 Mtpa tranche of LNG supply into the market around the 2023-25 period. That is not to mention new Qatari supply (North Field expansion), other advanced US projects (Tellurian, etc) and a range of other projects talking up prospects.
Much of the renewed optimism on the supply side has the feel of the market doubling down on the Chinese demand story. To be fair, we are pretty bullish China and have been arguing that the push to swap out coal for gas in the urban heating sector is far from over. Confirmation of this came as the Chinese Ministry of Environmental Protection (MEP) this month announced ambitious plans to switch heating systems in 4 million households and industrial plants from coal to gas or electricity in 2018. This would be a slight increase on 2017, when the MEP estimates that 3.94 million households in 28 Northern cities successfully switched to gas or electricity. Given the gas rationing experienced this winter, there will be unsatisfied gas demand as well, so next winter is likely to be just as tight, even with more LNG set to be on the water come Q4 18.
This month we noted that the seasonality in demand driven by NE Asia has led to a seasonality in freight rates. Over February, in sharp contrast to the surge seen in freight rates for cargoes seen since late Q3 17, daily charter rates fell by $20,000 per day to $60,000 per day as the market moved to chartering for April. As we know with the underlying LNG, the prices that prevail in a tight peak winter will not be sustained once underlying demand ebbs in the rest of the year.
For summer 2018, the big question is how low could prices fall when seasonal demand ebbs and the trio of scheduled Australian LNG trains (Wheatstone 2, Ichthys 1, and Prelude) come online over Q2 18. We continue to expect the TTF summer-18 delivery contracts to set the level where the market will head. While the European market has been rocked by some late winter cold, if that cold now ebbs (which is the current weather forecast) TTF prices should head back down to around 16 €/MWh (5.6 $/mmbtu). Any extension of the cold will leave a bigger European gas storage hole to fill over the summer, providing some support to the JKM and limiting the summer movement downwards. We do not expect to see supply-side cuts in summer 2018, but we do see the JKM-TTF spread narrowing. At the moment, that spread is averaging above 1.0 $/mmbtu over the summer, which seems far too wide given the Pacific supply additions expected.