The trends in the LNG market at the end of 2018 are continuing at the start of 2019. Supply is outpacing demand increments and JKM prices are slipping, as the NE Asian winter has given little call for additional buying. While the TTF is trading soft on a good chunk of incremental LNG coming into the market, the JKM-TTF Mar-19 spread has narrowed, from 1.35 $/mmbtu at the start of December to 0.9 $/mmbtu at Monday close. With the cargoes held in floating storage all largely now delivered, shipping rates have eased. Fearnleys put tanker rates last week down at 100,000 $/d, from 135,000 $/d mid-December. While that has helped lower the arb windows, netbacks for Atlantic basin cargoes are favouring Europe.
Northeast Asia saw the odd bout of colder-than-normal weather over December 2018, but 14-day and 30-day forecasts are calling for a continuation of the moderately warmer-than-normal winter weather that characterised Q4 18. Going into Q4 18, we argued that the big NE Asian importers had been busy buying cargoes over the summer for winter 2018/19 so that they would not be caught short. With Chinese buyers likely having bought everything they can physically take, and Japan and Korea having hedged at least a normal winter’s worth of gas, the call for spot cargoes has simply not been there over this winter to date. The underlying soft demand side means that peak winter has so far passed by without enough cold weather to push NE Asian buyers to restock. With the contract market close to shifting its prompt focus to March cargoes, even a late cold spell is unlikely to really roil the LNG markets, as the need to quickly restock will simply not be there. The overarching bearish feel to the LNG market has also been fed by the weakness in oil prices, with M+1 Brent closing at $58 per barrel on Monday. Such a Brent price—given, say, a 13.5% Brent index for term contracts—suggests a contract cost of gas at 7.9 $/mmbtu. With oil markets perhaps struggling to sustain rallies through Q1 19 and the TTF seeing some weakness from the comfortable supply position (due largely to incremental LNG), the scene is increasingly set for a much softer summer y/y in the global gas markets.
2019 could be a year of incongruity, with a rush of supply FIDs happening against the backdrop of a market in oversupply. ExxonMobil has already moved early, with the announcement last week that its partners in the 15.2 Mtpa Rovuma LNG project (Mozambique Area 4) have secured sufficient offtake commitments from project partners to facilitate a rapid move toward FID in 2019. In addition, the BP-led 2.5 Mtpa Tortue LNG project took its positive FID in mid-December.
New LNG supply terminal watch
We still expect four new supply trains to be starting up or ramping up in Q1 19. The 4.5 Mtpa Corpus Christi T1 and the 5.5 Mtpa Yamal T3 both began LNG exports in December 2018, while the 4.5 Mtpa Sabine Pass T5 and the 3.5 Mpta Prelude projects are starting up production and should add supply in Q1 19. Shell announced on 26 December 2018 that it had started production of natural gas and condensate at Prelude, and while a date for first LNG cargo export has yet to be published, we expect a first LNG export in the next four to eight weeks. Given that influx of new supply on the horizon—as well as the mild-to-normal Asian winter, which is limiting Q1 19 restocking demand—we now expect some 5.7 bcm y/y of incremental LNG supply to be available into the European market in that quarter.
For summer 2019, the 4.0 Mtpa Cameron LNG T1, 4.2 Mt Ichthys T2, 4.5 Mtpa Corpus Christi T2, 1.3 Mtpa Elba Island T1-5 and 4.4 Mtpa Freeport LNG T1 are still expected to add volumes into the market. 2019 started with a flurry of approvals and requests for permission from FERC needed for those US LNG projects to start, but chief among the projects facing timing risks is Cameron LNG T1. Sempra Energy maintains that the train will have a Q1 19 in-service date, but the fact that Cameron LNG only received approval to commission its flare on 3 January and has not yet even filed for feedgas introduction points to delays into Q2 19, which has been our assumption for months now. Kinder Morgan’s 10 mini-trains at Elba Island likewise face headwinds regarding start-up. The first train was scheduled to take feedgas in Q1 19, but it will likely face delays after returning its compressor to the manufacturer for corrosion repairs in late December 2018. Corpus Christi T2, which was approved to introduce fuel gas on 3 January, should be on track to take feedgas in late Q1 19 or early Q2 19, with first exports certainly likely by June.
Return to tender
The LNG demand-side—which globally has been quieter in 2018, with some signs of Chinese demand crowding out demand from other developing countries—has seen some life in the last week. Last week, Pakistan LNG invited bids for the supply of five LNG cargoes during March and April. This was Pakistan’s first tender since November 2018, when it tendered for three cargoes to be delivered between late January and late February. Pakistan’s interest in the short-term tender market notably cooled during summer 2018’s run-up in LNG prices. At that time, it cancelled a tender for six cargoes to be delivered in July 2018 and August 2018 and undertook no further spot tenders until the one in November 2018.
Another recently reluctant buyer also came back to the tender market last week, with Mexico’s CFE opening a tender for five LNG cargoes for delivery to Manzanillo in February to April. CFE also awarded a one-cargo tender for mid-January delivery at either the Manzanillo or Altamira terminals. Notably, CFE stated in August 2018 that it expected to stop tendering for LNG imports by the end of 2018 or early 2019. While this latest tender may be the final one, we have been and still are skeptical that this could happen so soon, as CFE plans to replace LNG with US gas pipeline imports. There is now sufficient cross-border capacity to do so, but the completion of Mexican downstream pipelines has been subject to serious downstream delays. Those delays have continued and we expect that the CFE will need to continue to tender for cargoes over most of 2019.