The JKM-TTF peak winter price spreads narrowed over September but are still in the 3-4 $/mmbtu range. At those levels, JKM prices are pulling spot cargoes—including from the US, West Africa and reloads from Europe—to the Northeast Asian market, leaving few spare cargoes for Europe.
Going into the gas winter, the key question is exactly how much Chinese LNG demand will there be? 2018 has already seen another surge in underlying Chinese demand, up by 24 bcm y/y over the first seven months of the year and posting average y/y growth of 28% in the summer months. Applying the same winter season uplift that we saw last year to this summer’s average daily demand suggests that over the six-month period between October 2018 and March 2019, China’s gas demand would be higher by some 41 bcm y/y. If we soften the summer base to allow for higher storage injections possibly being reflected in those demand numbers, that would still suggest y/y demand growth of 30 bcm (5 bcm per month).
China will pull on supply from sources other than LNG. A rise in domestic gas production growth in recent months has led us to be more supportive on domestic supply this winter—we now expect it to add some 6-7 bcm y/y over the coming six months. Pipeline imports will likely increase as well, but the absence of significant expansions in West-East pipeline capacity suggests that Central Asian supplies are unlikely to add more than 3 bcm of y/y growth.
That leaves China with at least a 20 bcm incremental demand hole to fill on paper, so LNG takes are likely to be dictated by available regas capacity. Some 5.5 Mt of LNG could be imported over the entire winter through new regas capacity that was not available at the start of Q4 17. In terms of terminals operational last winter, 4.1 Mt of ‘spare’ capacity was available based on nameplate capacity during the peak heating season of December to February—just 1.2 Mt in the north and 2.9 Mt in the south. The main uncertainty is the extent to which existing terminal capacity has been expanded by debottlenecking of downstream takeaway capacity. Even relative to our forecast that Chinese LNG imports will be up by 4.0 Mt in Q4 18 and 3.75 Mt in Q1 19 (10.5 bcm combined), there is some potential upside on those already very chunky increases. In terms of Chinese fundamentals, this fills around half of the remaining ‘demand hole’, pointing to another winter that China will only navigate with considerable shedding of industrial load.
Incremental LNG demand is also likely to be seen in Korea and South Asia. Meanwhile, we expect that total global winter supply will be up by 10.8 Mt y/y. Overall, this means European LNG imports will fall by just 0.2 Mt y/y in Q4 18 but grow by 0.8 Mt y/y in Q1 19, although most of that increase will occur in March. A colder-than-normal winter in Northeast Asia will see additional cargoes attracted to the region, pushing the LNG available to Europe further downwards.
With JKM peak winter futures prices staying just above the peak of 16% of Brent for spot LNG prices over the last few months, the real key metric for the market is the JKM-TTF spread, which has been trading largely in the 3–4 $/mmbtu range this summer, but is moving to the lower end of that range as the TTF surges on low storage levels and rampant carbon prices. A move below 3.1 $/mmbtu would discourage EU reloads, including Yamal volumes transhipped via European regas facilities. For peak winter, we expect that Yamal gas will be needed in Northeast Asia, keeping the spread above the 3.1 $/mmbtu level, but the subsequent summer is looking more relaxed and more gas should be seen in Europe, allowing the spread to narrow.