The abnormally warm February in Europe and NE Asia continues to leave its mark on the global gas markets, having left gas storage levels high and prices floundering. With the weather in March closer to the seasonal average, but still warmer y/y, hearty supply and indifferent demand has meant that the TTF and the JKM have seen precipitous falls in prices. While both of those global benchmarks have fallen, the JKM May-19 contract has softened to the point where it is trading at a discount to the TTF. With that resulting in even the odd Qatari cargo heading to Europe, this is a market looking very soft.
As such, the market is all about how it might balance. With global pricing signals pushing more and more LNG at the European market, the main question is can Europe take all of that LNG? The answer to that is a maybe, as the EU market is ending the winter season carrying some 24 bcm more gas in storage y/y. With our latest balances suggesting around 11 Mt (14 bcm) of additional LNG supply is going to be available for the EU markets y/y, that means EU balances are starting the summer some 38 bcm looser y/y.
The EU market has a number of levers to secure market balance and we do think storage will end the injection season 10-12 bcm higher y/y, while the power sector could deliver a demand fillip of up to 10 bcm. Together, that reduces the expected y/y summer supply overhang to around 16-18 bcm, which we expect will be further eroded by a reduction in summer production of 6-7 bcm in NW Europe (the Netherlands, Norway and the UK). This leaves a necessary 10-12 bcm reduction in supply from Algeria or Russia. If the supply from those two countries does not turn down, then some LNG supply would need to be reduced. The biggest wildcard is Russian flows, with Gazprom indicating over Q1 19 that it does intend to at least partially offset any reduction in customer nominations with additional selling on is short-term sales platform. How aggressive Gazprom is in terms of those sales, and the discount it is willing to take compared to prevailing hub prices, will ultimately dictate how low the TTF, and by extension, the JKM will need to go.
Two of the above EU components are particularly important for global pricing. First, the price at which the EU gets significant demand-side response in its power sector is now sitting around the 13.3 €/MWh (4.4 $/mmbtu) trigger, and such added demand would be fully exhausted if prices went all the way down to the 11.3 €/MWh (3.75 $/mmbtu) trigger at current coal and carbon prices. Second, with Henry Hub summer 2019 at around 2.8 $/mmbtu and freight rates now around 30,000 $/d, we estimate the TTF-Henry Hub arb will close when European prices dip below 4.15 $/t (12.5 €/MWh). So both of these aspects of the market balance are converging to be in the region of 4 $/mmbtu.
While the Q2 19 contracts have firm downward pressure on them, the Q3 19 balances are not as loose, with peak summer a period of much higher demand in Asia. Also, we do expect the return of floating storage into the market as we get to the end of Q3 19, so freight rates should be supported as we get towards the end of the summer and risks associated with winter 2019/20 come more clearly into view. Higher Asian demand and increases in freight rates will serve to support JKM prices, which should then both widen the JKM-TTF spread and raise JKM levels. We are forecasting that summer 2019 TTF prices will average 4.6 $/mmbtu, with the JKM averaging 4.8 $/mmbtu. In some months (May and June), the TTF will be as low as 4.4 $/mmbtu.