The JKM-TTF price spreads narrowed over July but are still up at 3-4 $/mmbtu for the coming winter month contracts. At those levels, JKM prices are pulling spot cargoes—including from the US, West Africa and reloads from Europe—to the NE Asian market, leaving few spare cargoes for European market.
Underlying demand has been strong on hot weather in the northern hemisphere, but some new supply seems to be appearing, with Kpler flow data putting output at Wheatstone consistently higher y/y, suggesting the facility’s second train is exporting volumes. Despite some last-minute regulatory safety issues to address, the 4.4 Mtpa Ichthys train 1 continues to aim for first exports for end-September and the 5.5 Mtpa Yamal plant is also still targeting first exports that month. The 3.5 Mtpa Prelude remains a bit of a guess, with Shell still saying first exports ‘sometime this year’, which we take to mean December.
While the market has transitioned into thinking about winter, some geopolitical risks for the LNG market have cropped up, with a main area of concern being whether the current cycle of tariff and counter-tariff measures between the US and China will continue and what impact it has on both underlying gas demand and gas trade. We have already seen a slowing in Chinese imports of US gas, even though retaliatory tariffs from China on US products have not yet been extended to cover LNG. China’s average monthly take of US LNG was around 0.3 Mt over January–May according to Kpler data. In June and July, however, the average has been less than half that.
Chinese importers are increasingly wary of becoming reliant on US cargoes given the current situation, and while the trade spat is not going to stop US cargoes heading to Asia, locational swaps of cargoes are going to be the way the market navigates the current period. The tension does make it far harder for any proposed US LNG project to sign up a Chinese buyer on a long- term SPA, making it tougher for those projects to secure FIDs.
Another potential impact from a full-blown US-China trade war would be a slowing of the Chinese economy, which would in turn lead to a deceleration in total primary energy demand growth. While gas would not be immune to such fallout, a key source of Chinese gas demand growth has been the coal-to-gas replacement programme across a range of industrial, commercial and residential uses. That swap is still occurring, spurred by air-quality improvement policies. While a slowdown in the Chinese economy would mean potential downside from our current forecasts for 2019, import infrastructure constraints in 2019 are likely to be a more telling growth constraint for Chinese LNG demand in peak months next year.
With JKM Feb-19 now back pricing at Brent times 16%, the observed peak for spot LNG prices over the last few years, further upside is only likely to be seen if crude prices drift further upwards. Such a jump could come from Iran attempting to close the Strait of Hormuz in retaliation for US sanctions. Iran’s rhetoric has been directed at oil exports from other producers in the region, but if Tehran actually attempted to blockade the strait then this would most likely curtail the movement of Qatari LNG tankers too. With Qatar exporting around 1.5 Mt of LNG every week, this would have a big direct impact on the LNG market. We see this as a low probability event, as the costs to Iran of such a move would be significant.