The pace of incremental LNG supply, which we expect to be 2.6 Mt higher y/y in November, is weighing increasingly heavily on the global gas market. NE Asian LNG spot demand has evaporated with the mild start to winter there, with stocks likely still building among NE Asian buyers. While the Q1 19-delivery JKM contracts fell by 10% w/w to around 10 $/mmbtu, both the JKM and TTF to Henry Hub spreads are still open to encourage peak winter supplies from the US. The arbs are still just in favour of sending US LNG to Asia rather than Europe in Q1 19, while spreads are dropping to levels that suggest US LNG will increasingly go to Europe over summer. With 14-day weather forecasts for NE Asia suggesting a mild start to December, there is little spot appetite in the region for January delivery, which combined with the presence of floating storage in Asia and falling crude prices (-7% w/w) will keep downward pressure on LNG prices.
Further JKM-TTF narrowing
NE Asian weather is set to continue to be mild, with HDDs forecast to be down by 23% y/y and 21% milder than the seasonal normal over the next two weeks. The winter-delivery LNG market has continued to slide as a result, with the JKM dropping by around 1 $/mmbtu across the Q1 19-delivery contracts, a w/w decline of 9%, on the lack of appetite in Asia for spot cargoes. While low spot demand in NE Asia has largely been down to heavy summer buying and low heating demand, South Asian demand has also been low. Bangladeshi imports were non-existent for much of November due to technical issues with its sole FSRU, and Indian demand ebbed on high prices, a slow start to life of its regas terminals, and a consistent period of higher y/y hydro generation. Through this period, underlying NE Asian LNG demand has been good, with early November indications showing incremental y/y growth in China (+2 Mt) and South Korea (+0.2 Mt). As such, the price slide is more about a 2.6 Mt y/y increase in LNG supply in November, and the heavy forward buying by big Asian importers over the summer. While the TTF dropped by around 0.5 $/mmbtu over the week as 14-day temperature forecasts were revised upwards, the JKM-TTF spread has fallen again, with the spread for Q1 19 easing to around 1.7 $/mmbtu. While this is still just wide enough to get US cargoes going into NE Asia, it is an increasingly tight call, with summer spreads dipping to just 1 $/mmbtu—even if summer is expected to see lower freight rates. Given freight rates this winter, reloads from Europe are no longer being supported, which means Yamal gas should stay in Europe. It will take a cold spell to fundamentally shift the tenor of the market given reports that there are still at least 20 floating spot cargoes reported in that region.
Argentina: Journey from importer to exporter
Argentina, one of the main Latin American LNG importers, has started to put in place the infrastructure to start LNG exports. The country is looking at ways to monetise its increasing production from the Vaca Muerta shale formation. State oil company YPF agreed a 10-year agreement with EXMAR for the 0.5 Mtpa Tango FLNG, a barge-based FLNG to be moored at Bahia Blanca from Q2 19. The facility is expected to ship up to eight cargoes a year, around 0.5 Mtpa. Bahia Blanca previously hosted an FSRU, the 3.8 Mtpa Excelerate Exemplar, although reports suggest that the vessel left the port at the end of October. Argentina resumed gas exports by pipe to Chile in October and proposals have been put forward to export Vaca Muerta gas from the Chilean coast. In addition, pipeline operator Transportadora de Gas del Sur (TGS) signed an MOU with Excelerate in September to evaluate the development of a further export terminal in Argentina.
Vaca Muerta gas production appears to be finally accelerating. Independent producer Tecpetrol, which owns 200,000 licensed acres in Argentina, has committed a $2.3 billion investment through to 2019 at the Fortin de Piedra field in the Vaca Muerta shale play. The company was targeting production flow of 15 mcm/d by early 2019, but it has reached that level in November, posting an increase from flows of just 1.4 mcm/d a year ago. With such good results from just one producer, the Vaca Muerta is moving to the point where Argentina will get more than enough gas over the coming years for its domestic needs.
Argentina does run with a gas shortage, albeit decreasing, during the southern hemisphere winter, so it will still likely import some cargoes during the months of April-September 2019. In 2018, it imported 2.7 Mt over those months but made no imports during the previous summer season. As such, even though the FLNG barge should be in place in Q2 19, it could be Q4 19 before we see regular exports. Argentina retains one FSRU, which we still expect it to use during the winter 2019 season for LNG imports. While Vaca Muerta gas production will eventually mean more LNG volumes will come from South America, the most immediate impact of the shale play will be to further reduce both Argentinian and Chilean demand for LNG imports.
|Fig 1: Argentina LNG imports, Mtpa||Fig 2: Vaca Muerta gas production, bcm|
|Source: Bloomberg, Energy Aspects||Source: IAPG, Energy Aspects|