The global gas market continued its soft start to 2019, with the JKM Mar-19 contract expiring at 7.3 $/mmbtu, compared to the 10.5 $/mmbtu at which it expired this time last year. While the LNG supply side has stayed strong so far this year, demand in Asia has started to slow.
With NE Asian LNG storage levels high on a mild winter so far, and winter risk largely out of the market, some bigger m/m losses are being seen in Asian imports. Indicative values from Kpler for February show a big sequential drop from China (-2.5 Mt m/m) but also y/y drops in both Japan (-0.6 Mt) and Korea (-1.2 Mt). With mild weather persisting in NE Asia through February and forecast into early March, all three of those countries are likely to want stocks to return to more normal levels, meaning soft LNG imports will likely continue into March and April.
With LNG supply growing globally (up by indicative 3.4 Mt y/y in February), high levels of supply have washed into Europe (up by 1.8 Mt y/y in January). The latter has also seen a mild winter, with the resulting meek demand allowing Europe’s y/y underground storage surplus to surpass 11 bcm by mid-February. With Europe expected to log an end-March storage carry out of over 20 bcm, and the promise of more LNG over the summer, the TTF has dropped to price levels that should encourage most of the coal-to-gas fuel switch possible in Europe over summer 2019.
With the TTF already pricing in a very loose set of summer gas balances, and the JKM having followed the TTF down, further global price downside could well be limited, but there are some caveats. While summer TTF is at a relatively low price given prevailing European coal and carbon prices, EU gas prices will follow the direction of those two commodities’ prices. This provides both potential upside and downside, although right now we feel the downside has a higher probability. If Cif ARA coal falls to 60 $/t and carbon to 18 €/t, then we expect the TTF to slip to 14.7 €/MWh (4.9 $/mmbtu), with the JKM dutifully trundling after it.
With current freight rates having fallen to around 50,000 $/d, the arbitrage cost between NE Asia and NW Europe has dropped to around 80 cents, which is just below where the JKM-TTF is currently trading. Our balances suggest that incremental Asian demand this summer is going to be 10.4 Mt, while Pacific basin and MENA LNG supply will be up by 6.2 Mt, leaving some 4.2 Mt of incremental gas to be supplied by the US. With US incremental supply put at 4.9 Mt this summer on fairly modest assumptions of ramp-up rates and heavier y/y Sabine Pass maintenance, this means that around 0.7 Mt of US supply will not be needed in Asia and will be pushed to Europe. As that is a relatively small amount, the JKM-TTF spread along the summer curve does need to move to only moderately below that arbitrage cost, which will help keep the JKM premium to the TTF at around 80 cents.
In total, we forecast EU LNG imports will come in 8.4 Mt higher y/y this summer, with some bias to Q2 19, when imports will be up by 5.8 Mt y/y. It should be noted that although this summer increment is already a sizeable amount to absorb, it is based on a conservative view on US supply growth.
Last, February has seen two big FIDs, both from US based projects with the 15.2 Mtpa Golden Pass and 10.8 Mtpa Calcasieu Pass projects both getting the go-ahead. While first gas is likely to be post 2022, we do think project development momentum could see over 100 Mtpa of new capacity sanctioned this year despite the softening LNG market.