In what was a very eventful October on the verge of the heating season, three key things stood out with potential implications for the rest of winter. First, the JKM curve saw a downward repricing over the month, taking peak winter contracts into an 11–12 $/mmbtu range, having spent most of the previous four months trading around 13–14 $/mmbtu. Second, more LNG has started coming to Europe, allowing sendout at EU hubs to rise. Third, freight rates have spiked, going from 110,000 $/d at the start of October to 175,000 $/d by the end of the month.
While a price drop at the JKM might suggest a softening of overall Asian demand, we think that it is more a reflection of low demand for spot cargoes. The NE Asian buyers had been active all summer buying up all they would need for a normal winter, while China has been importing all it can given its existing capacity limits. A mild October―never a big demand month anyway―just meant that buyers did not need to top up the LNG cargoes purchased in the summer. We still expect Asian LNG imports to grow by a strong 11 Mt y/y over this winter.
We think the boost in LNG supply to Europe in October was more about existing supply facilities ramping up and outperforming against expectations. Initial indications for October are that supply was up by 4.0 Mt y/y, which is well above production gains that could be attributed to trains added since October 2017 alone. Supply from those trains could have contributed a maximum 2.5 Mt of added output if they all operated at nameplate capacity. As such, the outperformance of supply in October 2018 was due to fewer outages and higher supply train utilisation. Final October supply numbers are set to be 2.0 Mt higher than we forecast.
The signs are that strong supply levels will persist, with at least three trains either exporting first gas in October or getting close to doing so. The 4.2 Mtpa Ichthys T1 broke its streak of delays and finally managed to get some LNG produced and exported by end-October. In the US, first exports from two of Cheniere’s projects, the 4.5 Mtpa Corpus Christi T1 and the 4.5 Mtpa Sabine Pass T5, are getting close, with Corpus receiving its FERC permission to export cargoes in late October. In addition, Egypt is looking to transition quickly from a net importer to net exporter, and all of this means more gas this winter than we previously expected. We have revised winter supply to be 5 Mt higher than our previous forecast over the six-month period, with 2 Mt of that due to the revision to the October numbers. As such, the tenor of our analysis is bearish.
With the Dec-18 JKM contract close to expiry, all focus has shifted to the Q1 19-delivery contracts. With NE Asian prices for that period softening after having already priced in peak winter Chinese demand in preceding months, price direction will now be sensitive to the weather. We talked last month about potential softening given the promise of new trains with unhedged volumes coming into the market. The downward pricing in October that did indeed occur means that this new supply is now reflected in prices. As such, the market looks more at risk from a sustained cold spell, which we think would push the JKM up to trading at 3–4 $/mmbtu above the TTF for the Jan-19 and Feb-19 contracts from trading around 2.5 $/mmbtu. With TTF prices also having priced out most risk and now back to the winter low we expected to see at 24.3 €/MWh (8.1 $/mmbtu), we think the EU market now holds more potential upside than downside. We think that JKM prices for Jan-19 and Feb-19 will trade in an 10–13 $/mmbtu range.