If this summer was meant to be a period of softness for gas prices, it is certainly not all going to plan. With the price developments seen this month, suggestions that the market is currently oversupplied ring rather hollow. May has gone from the summer curve trading in a 7-8 $/mmbtu range to ending the month with those contracts trading over 9 $/mmbtu.
EU gas hub prices continue to see strength, largely as a result of buoyant coal and carbon markets. The coal markets gained strength as oil price gains started to push up supply costs and Asian demand came back as the region’s utilities built stocks for the coming peak summer. The EU carbon price has been on an upward tear, pushing above 16 €/t in recent days having started the year at 7 €/t. The TTF continues to be the floor above which the JKM prices. However, at the end of May, when prompt buying shifted to cargoes for peak summer (July), the JKM–TTF spread started to widen back out to around 1.6 $/mmbtu.
Despite buoyant prices, none of the supply expected to materialise in Q2 18 has yet been seen. While the small, Cameroon-based 2.2 Mtpa Hilli Episeyo put its maiden cargo onto the water, there was no gas reported from the trio of Australian projects—Prelude (3.6 Mtpa), Wheatstone T2 (4.4 Mtpa), and Ichthys T1 (4.2 Mtpa). Instead, the Ichthys project pushed first LNG exports back to September, with a number of Asian buyers reportedly pushed into the market to backfill that lost LNG. For Prelude, a separate report suggested that its first cargo would now be Q4 18, but project lead Shell would only confirm that cashflow from the project was expected in 2018.
China continues to lead the way, with demand up by another 1.2 Mt y/y in April, with no sign of that strength abating. With ENN’s 3 Mtpa new regas terminal arranging a commissioning cargo and starting operations in July, the JKM curve looks to remain well bid for the remainder of the year. We now forecast that China’s imports in 2018 are going to be up by more than 13 Mt y/y.
Korean developments were also supportive of gas, with a late-May announcement that coal-fired generation will be curtailed during air quality (fine dust) events from H2 18 onwards. The Korean government is aiming to reduce fine dust coming from coal power by up to 43% y/y by early next year after a spike in air pollution problems earlier this year. As such, we expect Korean LNG imports to be stronger in H2 18 by around 0.25 Mt y/y, compared to our previous expectation of a drop in imports over that period of around 1.0 Mt y/y.
The first new FID for 2018 was agreed as Cheniere’s 4.5 Mtpa Corpus Christi T3 project received the nod. It was also notable as the first US project to take an FID since 2015, reflecting the new LNG market dynamics prevailing since China materially ramped up its imports in 2017. The next 18 months now promise to deliver a number of high profile FIDs that could add up to another chunky supply wave from 2023 onwards.
For 2018 as a whole, NE Asian gas prices will average 9.6 $/mmbtu, up by 0.9 $/mmbtu on our previous forecast on higher forecast TTF prices and wider expected JKM spreads. In Europe, prices over the summer should trade around the fuel switching trigger of 7.6 $/mmbtu (22.4 €/MWh). NE Asia will continue to follow the lead of the TTF, but it will price to attract most spot cargoes during the summer and winter peaks—driving out the JKM-TTF spread for those months.