Which way is down?

Published at 10:06 21 Dec 2018 by

Despite the key-consuming Asian countries of China, Japan and South Korea all seeing seasonally normal winter weather patterns, the price for the remaining peak winter JKM curve contract (Feb-18) continued to soften. By mid-December it priced around 9.3 $/mmbtu, about 0.3 $/mmbtu down from the start of the month.

The current softness in that market reflects the fact that NE Asian buyers, particularly the Chinese, were very active on the buy side over the summer, and we think they will have already contracted for every cargo they can physically take under normal weather conditions. With a mild start to winter leaving the NE Asia market with very healthy LNG stocks, the emergence of colder-to-normal weather over December is unlikely to stimulate a raft of buying for Feb-19.

With the use of vessels as floating storage largely ceasing, LNG tanker rates have corrected downwards from 195,000 $/d in mid-November to 130,000 $/d in mid-December, allowing the JKM-TTF spread to narrow even further. The sharp retracement of Brent to 55 $/barrel has taken away another potential supportive factor for LNG prices and makes a 9.35 $/mmbtu Feb-19 contract still look reasonably expensive, as it is still pricing near 17% of Brent.

The LNG market is also not likely to see much support in the coming months given a heavy slate of new train start-ups. The Q1 19 balances remain focussed on new gas supply from three new trains—4.5 Mtpa Corpus Christi T1, 4.5 Mtpa Sabine Pass T5 and 5.5 Mtpa Yamal T3—that are already either producing LNG or exporting cargoes. Shell has kept expectations high that its 3.6 Mtpa Prelude facility will also be exporting LNG at the end of 2018, although that timeline may slip into early 2019. With 14.5-18.1 Mtpa of new supply capacity becoming operational just over December and early January 2019, Q1 19 supply should remain robust, rising by 6.3 Mt y/y.

Against that supply performance, underlying Asian demand will grow by just 2.7 Mt y/y in Q1 19. Growth will still be strong in China, with its LNG demand up by 3.6 Mt y/y, but weakness in the rest of Asia and across most other regions does promise more LNG for Europe. The trend of supply outpacing demand is expected to continue throughout most of 2019, with summer supply up by 14.5 Mt y/y but Asian demand rising by just 8.7 Mt y/y. With demand weakness in the rest of the world, more incremental LNG will turn up in Europe looking for a home, which could amount to 11 Mt in 2019.

All of this is bearish for 2019 gas prices, and in relative terms (compared to competing fuels), we are bearish as well. However, we could see some support creep into flat prices from the general fuels complex. For instance, we expect that JKM-TTF spreads for summer 2019 will narrow but that the JKM will average around 8.6 $/mmbtu, vs an 8.3 $/mmbtu TTF price. While these outright prices are above the current JKM and TTF curves, that is due to our expectations that Brent will average 76 $/barrel over the summer, up from 55 $/barrel in mid-December. However, a further fall in the Brent price would weigh on Cif ARA coal prices, easing the TTF and taking the JKM down with it. In other words, the TTF will price to get more gas into power, but if coal is at 100 $/t and EU carbon is at 28 €/t, such fuel switching could happen at a higher absolute gas price than experienced in summer 2018. In that case, even with a much narrower JKM-TTF spread, global prices could still stay around current levels—well above where prices would need to go to choke off LNG exports from the US.

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