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Bearish sentiment is dominating global LNG markets at the start of 2019. Injection season 2019 TTF contracts have dropped by $0.75/mmbtu to just below $6.50/mmbtu since the start of the winter amid a wave of new supply projects. Two new US projects—Sempra’s 0.65 bcf/d Cameron LNG T1 and the smaller Kinder Morgan 40 mmcf/d Elba Island T1—received key FERC approvals in February, putting them on a trajectory for first LNG in Q2 19. JKM prices for injection season 2019 have fallen faster than those at the TTF, by $1.85/mmbtu to $7.00/mmbtu, over the past three months, narrowing the JKM-TTF spread to just $0.50/mmbtu and pushing cargoes to Europe. Russian and US gas has been bound for Europe over this winter and this is set to continue throughout 2019. Unless the JKM-TTF spread is above $2.25/mmbtu, Yamal’s offtakers are disincentivised from reloading gas sent to Europe to send to Asia. This helps drive our forecast for European imports to grow by 1.4 bcf/d y/y (9.7 Mtpa) in Q2 19-Q3 19. Chinese imports are set to grow by 1.0 bcf/d y/y (6.2 Mtpa). These numbers pale in comparison to the forecast 4.3 bcf/d (30.8 Mtpa) of new supply in 2019 though, which will keep prices soft throughout the year.
Summer supply wave
Strong LNG supply, emanating in part from the US, has left global gas prices on a bearish trajectory for 2019. For injection season 2019, TTF futures now average just $6.03/mmbtu, down from the $7.26/mmbtu where those same contracts traded at the start of November 2018. The new volumes include LNG from Cheniere’s two 0.65 bcf/d (4.5 Mtpa) facilities, Corpus Christi T1 and Sabine Pass T5, both of which began production in Q4 18 as they move towards commercial start-up in Q1 19. Australia’s 0.5 bcf/d (3.5 Mtpa) Prelude FLNG is also contributing to the early 2019 glut after its December 2018 start-up. Early February came with news that more LNG supply is on the horizon in the US. Sempra’s Cameron LNG T1 received approval to introduce feedgas on 4 February, which will add another 0.65 bcf/d to US exports when it starts-up in late Q2 19. Elba Island also received authorisation to start commissioning using fuel gas at its facility, which will likely see it bring one of its mini-trains online in Q2 19, boosting supply by 40 mmcf/d.
Europe has been the beneficiary of this supply deluge. JKM prices over January saw a deeper drop than the fall at the TTF, which pushed spot cargos away from Asia and into Europe. A very mild winter has limited spot purchases from the major Northeast Asian buyers as HDDs are 4% and 5% below the five-year average so far this winter in China and Japan, respectively. At the start of winter, the JKM-TTF spread for the heating season was $3.00/mmbtu. As the winter contracts have come off the board, that average slid to $2.09/mmbtu by the end of January. The narrowing of the spread is continuing for the 2019 injection season as well, sitting at $0.84/mmbtu at 11 February’s close. This is down from $1.55/mmbtu at the start of November 2018, as JKM prices have fallen by $1.85/mmbtu to $7.00/mmbtu in the heating season to date.
The destinations for US shipments exemplify Europe’s growing role as the proverbial sink for global LNG markets. Sabine Pass sent 16 cargoes to Europe in 2018 through the end of November. As the JKM-TTF spread narrowed, Sabine delivered 13 cargoes to Europe in December 2018 and another 13 in January 2019. Cove Point’s entire capacity is subscribed to India’s GAIL and a joint Japanese venture of Tokyo Gas and Sumitomo. Both parties have been looking to swap their booked capacity from the terminal, and six of Cove Point’s cargoes ended up at European ports in 2018. January saw swaps result in four Cove Point shipments make their way across the Atlantic.
This phenomenon is not limited to US-sourced LNG either. Yamal, where a third 0.75 bcf/d (5.5 Mtpa) train came online in December 2018, has also contributed to the supply wave that has washed ashore in Europe. Over Q4 18, Yamal accounted for 30% of receipts into Northwest European ports. For much of the year, Yamal’s offtakers tranship gas through Europe. As the JKM-TFF spread has narrowed so significantly over the past few months, the economic incentive is dictating that Yamal gas stays in Europe to be sold on a spot basis into local hubs. Reports indicate that PetroChina, which receives 0.4 bcf/d (3.0 Mtpa) from Yamal under a long-term contract, has offered cargoes for delivery in Northwest Europe rather than taking them all the way to China. The PetroChina reports come even as West of Suez freight rates slipped to just $65,000/day in January, down from $175,000/day in November 2018, which lowers the overall cost of such transhipments.
We believe that the JKM-TTF spread needs to be above $2.25/mmbtu for Yamal cargoes to be reloaded in Europe and brought to Asia, meaning Europe can count on Russian LNG arriving throughout 2019. Europe is one of the few regions that is expected to see significant import growth in Q2 19 and Q3 19. We forecast European imports in summer 2019 will be up by 1.4 bcf/d y/y (10.0 Mtpa), outstripping Asian growth of 1.3 bcf/d y/y (9.7 Mtpa). China will make up the lion’s share of our forecast Asian growth, up by 1.0 bcf/d y/y (6.2 Mtpa), far outpacing Northeast Asia’s other major importers. We project Japanese imports will be flat to moderately up, while South Korean imports will contract by 0.2 bcf/d y/y (1.7 Mtpa) on expectations of higher nuclear generation. South Asian forecast import gains of 0.6 bcf/d (4.0 Mtpa) are dependent on new infrastructure, which has seen continued delays in both India and Bangladesh.
The good news for US LNG exporters is that the netback for Henry Hub-linked LNG remains in the money for European cargoes despite recent global price softness. We forecast that window will stay open, even as there is room for further softness in hub prices given the additional 4.3 bcf/d (30.8 Mtpa) we expect in y/y supply growth in 2019. As winter buying fades away, it looks like springtime is on the way for LNG bears.
|Fig 1: Global arbs, $/mmbtu||Fig 2: Upcoming US LNG liquefaction trains|
|Source: Refinitiv, Energy Aspects||Source: Company websites, Energy Aspects|