Despite TTF prices moving up on a last bit of heating demand, the EU balance still looks incredibly weak with the y/y storage surplus lingering through April. With storage so high and LNG still coming in strongly, the TTF looks overpriced for both the summer and the coming winter, suggesting that whole curve needs to see some downward repricing. The JKM will follow, even if the JKM-TTF spreads do not need to shift much from current levels. While summer could see some demand upside if peak summer 2019 is very hot in NE Asia, both capacity changes (growing solar and higher nuclear) and the fact that last summer was decidedly hotter than normal mean any uplift in demand from hot weather from either Korea or Japan is likely to be muted.
While global gas prices are decidedly soft, the summer TTF is looking a bit overpriced, given it has gone through April and has not really started to erode the y/y storage surplus. By contrast, in early trading Monday (29 April), the TTF was taking strength on revised forecasts for NW Europe that put temperatures for the next two weeks at or below seasonal normal. While that should cause some spring heating demand, it will be limited and unlikely to make a big dent on the y/y storage surplus, which still sits above 25 bcm. As EU storage can only end October with an absolute maximum surplus of 12 bcm y/y, the market will have to curtail injections, and the sooner that happens, the more muted the downside in EU prices will need to be. One key issue is that the TTF winter contracts have been strong, pricing well in excess of where we expect they need to be in a normal weather winter given the outlook for LNG supply and the overhang of storage. As such, there is still a strong economic incentive to inject, driving some buying at the prompt. However, storage injections now help keep end-user demand down. We see the summer TTF potentially needing to price down to around the 13.3 €/MWh level (4.3 $/mmbtu) from current levels, which are around the current 4.8 $/mmbtu level, for the European market to balance.
The Jun-19 and Jul-19 JKM-TTF spread continues to price above 70 cents, and we think a JKM-TTF spread of 60 cents/mmbtu (on slightly higher freight rates than last week) would be needed to make the TTF the destination of choice for US cargoes. The peak summer JKM summer contracts should continue to see sufficient buying to stay above that level for most of the trading time. While we think spreads might soften a little until freight rates start to improve, the TTF will eventually be prone to downside, and this should take flat JKM prices down with it.
NE Asia—demand upside limited by capacity changes
In both Japan and Korea, there is a tendency to use gas as the peak demand fuel in their power sectors over the summer. As such, a hotter summer could well provide some uplift to demand in both countries. Understanding CDD-driven demand for LNG is complicated, as there are plenty of confounding factors that will shift the level of response of gas-fired generation to the need for air cooling. Primary amongst these is changing capacity measures for non-thermal generation that will tend to shift the merit order upwards, meaning less gas response to any level of CDD. In Japan, the main renewable addition has been solar power, and in 2018 the country added just under 6.5 GW of new solar capacity, taking its installed solar to 55.5 GW. South Korea started investing in solar later than Japan but still added around 2 GW in 2018, taking its total to 7.8 GW. With solar’s highest availability in the summer, and as solar tends to follow summer power load well, those capacity additions are likely to mute any potential gas-fired increments.
While solar is important in both countries, so is nuclear. Japan restarted some 4.7 GW of nuclear capacity in 2018, although 2.36 GW were started in Q1 18 and were operational throughout all of summer 2018. The remaining 2.36 GW were both started in Q2 18 and were operating through Q3 18. As such, the y/y differences due to nuclear are not going to be overly important for peak cooling months of 2019. For Korea, summer 2018 did see a fairly high level of nuclear outages, but such outages are set to be much lighter over summer 2019. Online Korean nuclear capacity is set to average 19.0 GW across Q2 19 and Q3 19, in comparison to the 16.6 GW seen in summer 2018 (up by 2.4 GW, 14.4% y/y).
The changing capacity positions have reduced any observable correlations between CDDs and LNG imports across these two countries. In 2018, Korea saw Q3 18 CDDs come in 7% higher y/y, which led to an average increase in LNG imports of 0.53 Mtpm (20%) over the July–October period (we include October as peak summer heat can often drive restocking demand in subsequent months). In Japan, CDDs were only up by 3% y/y, but LNG demand was up by 0.3 Mtpm (5%). We do note that in both countries, Q3 18 was hotter than the seasonal average, with Korea CDDs up by 13% on normal and Japan up by 6% on normal. While this analysis does little to establish a firm relationship between the regions’ CDDs and underlying demand, we can say if there is a reversion back to normal weather for Q3 19, then LNG demand from the power sector would expect to be lower in both Japan and Korea. To keep the same level of power sector demand in Korea for cooling needs would require another very hot summer; average CDDs would need to be over 13% higher than normal. Every one percentage point increase in CDDs seen above last year’s levels across Q3 19 would drive added LNG demand of around 0.04 Mtpm.
For Japan, the numbers are less dramatic, but the summer would need to be some 6% higher than normal just to meet last year’s cooling demand. Every one percentage point increase in CDDs seen above last year’s levels across Q3 19 would drive added LNG demand of around 0.03 Mtpm over that July–October period.
|Fig 1: CDDs and LNG imports, y/y change||Fig 2: EU storage, bcm|
|Source: Bloomberg, Japan MoF, Korea customs, Energy Aspects||Source: GSE, System operators, Energy Aspects|