JKM softening

Published at 20:27 8 Nov 2018 by . Last edited 11:18 22 Aug 2019.

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In a very eventful October on the verge of the heating season, three key factors stood out with potential implications for winter. First, the JKM curve saw a downward repricing over the month, which took peak winter contracts into an $11–12/mmbtu range after having traded around $13–14/mmbtu for the previous four months. 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. With November in NE Asia starting out warm, it could be a while before Asian buyers return to the spot market to replenish stocks, so Q4 18 is looking soft. We think JKM prices will trade in a $10-13/mmbtu range this winter, while new US supplies may start looking for a home in Europe.

JKM soft on little spot demand, buoyant supply

JKM prices for delivery in winter 2018/19 have traded between $13-14/mmbtu over most of 2018, but the index saw a downward repricing in October, with peak winter contracts falling to $11-12/mmbtu. We believe this reflects low Asian demand for spot cargoes rather than a weakening of overall Asian demand. The major Northeast Asian buyers of Japan and South Korea were active market participants all summer as they built stocks to a level deemed sufficient in advance of winter. Chinese imports have been pushing up against existing capacity limits in 2018, though this issue will be lessened during the winter, given the Q4 18 and Q1 19 start-up of an additional 0.3 bcf/d (2.3 Mtpa) of regas capacity between the facilities at Shell’s Qidong and CNOOC’s Putian.

We predict that Asian LNG imports will increase by 3.4 bcf/d (11 Mt) y/y during the coming winter. This assumes normal weather, though much will depend on how much weather deviates from current forecasts. Indeed, part of October’s soft pricing was the result of mild autumn weather in East Asia, which limited the need for spot cargoes among the big buyers. We expect Korean and Japanese demand will be more sensitive to cold weather than Chinese demand, as China will need to interrupt some demand to balance this winter even under normal weather.

A rash of new supply projects coming online is currently led by the 0.65 bcf/d (4.2 Mtpa) Ichthys project in Australia. The facility produced first LNG and shipped a commissioning cargo in late October after a string of delays pushed it from its initial start-up date of Q2 18. Meanwhile, Cheniere continues to move towards first LNG at its two upcoming 0.70 bcf/d US projects—Sabine Pass T5 and Corpus Christi T1. Each is receiving feedgas, and Corpus Christi has permission to export commissioning cargoes from 30 October. While the timing of that first cargo is unknown, we expect it in November, given Corpus Christi has already taken 2 bcf in feedgas. We expect Sabine Pass T5 to contribute to exports by the end of the year as well. Sempra Energy is on track to add to US liquefaction capacity early in 2019, after it announced in its recent earnings call that it expected to produce first LNG at the 0.60 bcf/d Cameron T1 in Q1 19. FERC authorisation to begin commissioning processes at the facility came through on 31 October.

Those supply gains are likely to benefit European gas stocks. High JKM prices over the summer led to a JKM-TTF spread that stayed above $3.00/mmbtu and saw spot cargoes into Europe shrink in 2018, driving the continent’s y/y gas storage deficit to 45 bcf (2% of total inventories). Even though TTF prices have fallen recently as well—by 9% in the last week of October for the Dec-18 contract, to $7.93/mmbtu—the JKM-TTF spread has dropped to just over $2.50/mmbtu. A significant rise in the freight rates for LNG tankers is likely to push up import costs to Asia, with shorter trade (from the US and Russia to Europe) the likely beneficiary. October saw the LNG market affected by an increase in the underlying rates for a spot hire in East of Suez markets, which went from $110,000/d at the start of the month to $175,000/d at its close. This is also a substantial y/y increase from $52,000/d in October 2017.

The increase in freight rates points in part to an expansion of demand amid growing LNG trade, with the prospect of three new trains driving the need for more tankers. There are also reports of ships laden and anchored at Southeast Asian ports, with traders having arranged cargoes on the basis of this summer's nearly $1.00/mmbtu contango on the JKM curve —between, say, the Sep-18 and Dec-18 contracts—and the tankers serving as floating storage to facilitate those transactions. Those tankers being out of service for normal transport use is likely putting additional upward pressure on freight rates. Despite these factors, daily tanker rates only affect the netback levels at the margin. The bulk of LNG trade is done by participants that have ships under some form of long-term contract, which are unaffected by freight prices. Spot contracts—such as those Europe will need to close its y/y storage gap—are the only cargoes that will be affected by the rise in rates.

Of course, even with rising freight rates and the start of a new wave of supply projects, an increase in imports to Europe is by no means guaranteed. A cold Asian winter could see the region overshoot our forecast for a 3.4 bcf/d y/y increase in imports to Asia, driving the JKM-TTF spread back to the $3.00+/mmbtu range it was at for most of the summer. The spread will be the most important factor in determining the destination of spot US LNG cargoes. This would leave US liquefaction projects with plenty of destination options across both the Atlantic and the Pacific throughout this winter.

Fig 1: LNG freight rates, $/day Fig 2: Upcoming supply targets, bcf/d
Source: Bloomberg, Kpler, Energy Aspects Source: Company websites, Energy Aspects

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