TTF prices will likely soften further due to the need to get more gas into the power sector than is currently priced in. The JKM should follow the TTF down. Still, with expected downside to the TTF coming in around 14.1 €/MWh (4.6 $/mmbtu) and the LNG market nearing the end of its seasonally weakest period, a further drop below that price level seems unlikely. The JKM-TTF spread will remain attuned to demand-side developments, with key drivers being the extent of South Asian demand and summer heat in NE Asia. Failure to see any large increase in Asian demand over the coming months will be bearish for the JKM curve and would help to keep JKM-TTF spreads tight. Conversely, a hot summer in NE Asia will support prices in late summer and early autumn as restocking demand will be heavier.
While the global markets were still adjusting to the last two weeks repricing at the TTF, European prices started to ease back as weak European supply-demand fundamentals reasserted their influence. With European fundamentals still looking loose and significant heating demand on the cusp of ending until next winter, the TTF is primed to slide a bit further down in relative terms. TTF prices should ease over the next two weeks as that market needs to get more gas into power to balance this summer, and the JKM should follow European markets down. With buying for May-19 at the JKM largely over, the market is now starting to focus on Jun-19 and Jul-19, and neither of those contracts are likely to be as soft as May-19. Asian demand will start to pick up to ensure the region can meet peak summer demand and that will be followed by stockbuilding for winter come September. A hot summer would provide further price support due to heavier restocking needs.
The JKM premium to the TTF has stayed around 80 cents/mmbtu for Jun-19, favouring US cargoes heading to the Asian market. The key to how wide the JKM-TTF spread will be in the coming months could rest in the hands of South Asia, where Indian imports could start to pick up in response to low prevailing JKM prices. India started the year shedding LNG imports y/y, largely driven by the high prices in Q4 18, which will have limited Indian buyers’ interest in cargoes for Q1 19 delivery. Kpler indications for March are that imports were down by 0.3 Mt y/y, with imports in all three of the months in Q1 19 down y/y. With lower prices now influencing buying decisions, we should start to see Indian imports tick up.
We did talk in last week’s Panorama about the start of the summer maintenance period and how it will cause supply to be variable. A pick-up in pipeline flows into Sabine Pass suggests that two trains have already come back from maintenance, leaving one still offline. Even with heavier summer maintenance, supplies are still going to outpace the rise in global demand.
|Fig 1: EUA price, €/t||Fig 2: China imports of US LNG, Mt|
|Source: Refinitiv, Energy Aspects||Source: Kpler, Energy Aspects|
ENN and US LNG
As we expected, the persistence of the US-China trade war has made it difficult for US LNG to end up in China and for US LNG supply projects to sign up Chinese buyers for long-term contracts. One deal that seemed to be running contrary to that general theme was ENN’s expected purchase of Toshiba’s LNG assets in the US. Toshiba and ENN had agreed for ENN to take 100% of Toshiba America LNG Corporation for a paltry $15 million. Toshiba had also agreed to make a one-off payment of $821 million to ENN to pass on the 2.2 Mtpa 20-year LNG purchase commitment Toshiba has with the Texas-based 4.4 Mtpa Freeport LNG Train 3 project.
The deal for ENN to purchase Toshiba’s US LNG business was initially planned to be completed by the end of March, subject to approval by the two companies’ shareholders and the Committee on Foreign Investment in the United States (CFIUS), the US government body that vets the national security implications of foreign direct investments. Toshiba last week blamed the delay in the CFIUS review on the US government shutdown earlier this year. Last week, ENN announced that its board decided to terminate the proposed deal after shareholders voted against it. Opposition was reported as mostly coming from ENN’s second-largest shareholder, Hony Capital, parent company of Chinese tech giant Lenovo.
Whatever ENN’s reasons for backing out of the deal, Toshiba now has to figure out what to do with its 2.2 Mtpa offtake from Freeport LNG T3 supply that will be starting in 2020, in a deal that requires Toshiba to pay about $360 million per year. For Toshiba, breaking even under the deal with US feedgas prices of around 2.8 $/mmbtu would require global gas prices to be consistently above 8 $/mmbtu. Toshiba will want to still lift gas even at lower global prices than 8 $/mmbtu, provided it is helping to pay some of those fixed costs back. In the event of not finding a long-term buyer to take that supply off its hands, Toshiba is faced with the option of selling the gas in the short-term LNG markets. Such selling could be done through a series of short-term tenders for FOB LNG supply, which has been done at other LNG terminals (such as Angola LNG), or by signing up a trading house with a remit to monetise those volumes in the short-term markets. Toshiba is potentially facing a future where it will be taking exposure to LNG spot prices. The Freeport LNG project will be largely unaffected by this as Toshiba will keep its obligations to take supply until it finds another buyer. Still, the pulling out of ENN from purchasing Toshiba’s US LNG business does highlight the difficulty US projects are having in signing up Chinese buyers for long-term supply.