Great eight

Published at 16:47 30 Apr 2018 by . Last edited 15:12 5 Nov 2018.

The shoulder season is usually a time of gas market weakness, but April LNG prices drew support from a European market with a tight supply-demand balance.  European prices were buoyed by a storage gap that widened to 10 bcm, an increase in planned Norwegian summer outages, a Dutch government announcement on drastic production cuts at the 20+ bcm/y Groningen field, and a carbon price that posted another chunky m/m increase.     

The strength at the TTF has, over the month, generally come with some narrowing of the JKM-TTF spread at the front of the curve. The spread on the front-month contracts narrowed the most, usually when the delivery window gets short enough that Asian buyers drop out. For delivery months further out, spreads have stayed around 1 $/mmbtu, which is just wide enough to keep North American gas largely favouring the JKM to the TTF on a netback basis. In general, that netback will consistently favour the JKM when the spread is above 90 cents/mmbtu and consistently favour Europe when it drops lower than 60 cents/mmbtu. In between, the level of fixed vs variable costs will differ depending on the participants, and thus so will the determination of whether cargoes will favour Europe or Asia. 

Some price support also came from supply outages, with PNG LNG and Skikda exports disrupted by natural disasters and/or maintenance over all of March (indicative supply data suggests a combined 1.0 Mt m/m drop) and most of April. Still, the last couple of weeks saw PNG LNG return to service, promising 0.6 Mt per month in supply when fully ramped up (expected in May).  

JKM gas prices have pushed above 8 $/mmbtu for the summer contracts from Jul-18 onwards, which largely allows full fixed-cost recovery for North American gas. As a result, producers have become excited again about LNG export projects, particularly with progress towards FID seen on the 12 Mtpa LNG Canada, 12 Mtpa Mozambique LNG, and the 4.5 Mtpa Corpus Christi T3 projects. 

Of more immediate concern, regarding the three terminals expected to be added in Q2 18, the much-delayed 4.2 Mtpa Ichthys T1 is going forward. Reports said that Inpex bought a cargo of LNG, which landed in late April, to cool the Ichthys LNG plant. The 3.6 Mtpa Prelude was also reported as receiving a cargo of LNG, on 24 April, to cool down the tanks there. Both Prelude and Ichthys are taking gas from Australia’s Browse basin. Prelude is likely to export a cargo first, as it does not need to move the gas down a pipeline to an onshore facility. We still expect first LNG exports from both projects in Q2 18. The last of the three big Q2 18 Australian start-ups is the 4.5 Mtpa Wheatstone T2. In its Q1 18 results in April, Woodside announced that the project was 97% complete and LNG production would begin this quarter. We expect first commissioning cargoes from all three terminals in June. 

Most of the action on contracts for delivery in Q3 18 will depend on just when the Australian terminals ramp up. This will have an impact on JKM-TTF spreads. With all that new supply firmly stuck in the Pacific basin, there will be increasing pressure on JKM-TTF spreads to narrow and increasingly be pushed below 60 cents/mmbtu. We only expect to see a more profound bias for North America LNG to stay in the Atlantic basin once spreads drop below that tipping price. The projects carry some delay risk and cargoes are not likely being hedged until commercial start-up is declared, so much of that downward pressure might have to wait for another month or so.   

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