The JKM-TTF price spread widened further over June, with the remaining summer contract spreads around 3 $/mmbtu and peak winter up closer to 4.75 $/mmbtu. At those levels, JKM prices are pulling spot cargoes—including US, West Africa and European reloads—to the NE Asian market. With high demand in Asia drawing in LNG, incremental supply to Europe will remain curtailed. Going forward, the global LNG market is showing all the signs of having two peaks—or maybe one long peak—punctuated by a short Q2 shoulder period.
The 4.4 Mtpa Wheatstone Train 2 project was confirmed by Woodside as having started producing LNG in mid-June. While it will probably need to fill its tanks first before a commissioning cargo is loaded, this is the start of a process that should see the project going to full commercial operation in Q4 18. Actual exports over the next two months are likely to be somewhat patchy, and the project developers have already announced an outage in September to prepare it for commercial operations. The train could contribute some 0.4 Mt of supply over Q3 18, before it fully hits its 0.36 Mtpm capacity in Q4 18. All of the other new trains expected online this year are likely to be Q4 18 start-ups.
With Chinese demand adding another 1.3 Mtpa in incremental imports in June, the Asian market just keeps hoovering up volumes, and this should continue throughout the summer. Outside of the demand hothouse that is China, there have been a few developments that point to softening in LNG demand from other regions. The most pronounced softening has been in Egypt, with the Zohr super-field ramping up quickly and about to hit another production rate milestone in August, when it goes to 1.75 bcf/d. At this rate, Egypt’s nine-cargo tender, of which it only filled for six cargoes, feels like a last hurrah for them on the buy side.
Further demand-side weakness is to be expected in Turkey, following the much-anticipated operational start of the 16 bcm TANAP pipeline, which connects gas from Azerbaijan to Europe. Elsewhere, Argentina has announced intentions to increase pipeline exports to Chile in the summer, which will reduce some Chilean demand for LNG this summer. Next summer could still be reasonably tight because of high Chinese demand, particularly if any of the US trains expected online next year, particularly the three-train, 12 Mtpa Cameron LNG project, are delayed.
June saw the EU’s competition authority train its sights on LNG imports, and specifically on whether Qatar has any restrictive clauses in its fixed-term supply contracts for exports into Europe. We think this investigation will be most important for the 7 Mtpa of supply contracts going into the southern European markets of Italy and Spain, and could reduce some of the market inefficiencies that manifest themselves as cargo reloads.
For Q3 18, NE Asian prices reflect the move into peak cooling season and the fact little in the way of gas exports have started up from the three new Australian trains we had been expecting online in Q2 18. With most of the new supply now largely going to be absent from the peak summer months, a dramatic narrowing of the JKM-TTF spreads seems unlikely over the peak cooling period. There may be a little respite as the global market starts to buy for September, with the JKM premium narrowing to TTF. But we expect that as October comes more into focus, NE Asia will be stocking up for the start of what could be another lively winter in the gas markets.