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Europe remains inundated with LNG supply given an 875 bcf y/y storage surplus and April port receipts that were 6.8 bcf/d higher y/y. We think summer 2019 TTF prices will need to drop to around $4.30/mmbtu, from $5.00/mmbtu currently, to encourage Europe to send enough gas into power to balance. A projected 1.0 bcf/d y/y decrease in Russian flows this summer will also help ease the supply overhang. We believe that a JKM-TTF spread below $0.60/mmbtu will be needed this summer to make Europe the main destination for US-sourced cargoes. While we expect Chinese import growth of 1.4 bcf/d y/y during the injection season, shifts in the merit order for power in Japan and South Korea will eat into those countries’ gas demand. Each will see nuclear availability higher by 2.4 GW y/y, while Japan has 6.5 GW of new solar capacity that will steal gas market share. We expect flat Japanese LNG imports this summer and a 0.9 Mt y/y drop in Korean takes. Despite expectations for low LNG prices, we forecast injection season Henry Hub prices of $2.60/mmbtu will keep the arb open between the US and both Europe and Asia.
European balances still look weak as Q2 19 progresses, with the continent’s y/y storage deficit just below 875 bcf y/y at the start of May. With storage so high and LNG supply still coming in strong, April LNG port receipts in Europe of 12.0 bcf/d were up by 6.8 bcf/d y/y. The TTF curve looks overpriced for both summer 2019 and winter 2019-20 at current prices of $5.00/mmbtu and $7.00/mmbtu respectively. Even at those prices, demand response has been muted in the European power sector. Tumbling Cif ARA coal prices have limited the impact of fuel switching. In Germany, which is seeing some coal-to-gas-switching, higher renewable generation is still dampening the total uplift in gas consumption. Solar and wind’s share of the generation mix hit a record high in March in Germany of just over 33%, a dynamic likely to persist all summer.
We see summer 2019 TTF prices needing to drop to around $4.30/mmbtu for the European market to balance. That would push enough gas into power for Europe to begin chipping away at its storage overhang. Even at a TTF price of $4.30/mmbtu, the arb for US LNG cargoes will still be open though, given our forecast for summer 2019 Henry Hub prices to average $2.60/mmbtu. East of Suez freight rates are also currently below $30,000 per day, limiting shipping costs from the US to Europe.
Other gas supply sources will need to fall for Europe to balance this summer, as the continent cannot end October with an inventory overhang greater than 425 bcf y/y as stocks would be full. One of the big summer questions concerns whether Russian flows will fall and help compensate for the looseness caused by more LNG supply and high storage inventories. In April, total Russian flows came off by 0.85 bcf/d (-5%) y/y. Gazprom sold 1.0 bcf/d of the 16.7 bcf/d sent to Europe through its short-term Electronic Sales Platform (ESP), up by 0.1 bcf/d m/m. ESP sales have risen every month since starting in October 2018. Given the sequential increases, we expect to see selling on the ESP to the tune of 1.1 bcf/d over the entire summer. The lower need for gas injections into storage will reduce pipeline nominations by a forecast 2.0 bcf/d y/y. As such, we expect a reduction in total Russian imports of just under 1.0 bcf/d y/y in summer 2019.
In terms of LNG supply, we believe that a JKM-TTF spread below $0.60/mmbtu will be needed this summer to make Europe the prime destination for US-sourced cargoes (given prevailing freight rates). That spread closed 26 April at $0.75/mmbtu for Jun-19 and averaged just under $1.00/mmbtu for the balance of summer. Peak summer 2019 JKM contracts should continue to see sufficient buying to stay above the $0.60/mmbtu level to draw LNG cargoes. Chinese imports are projected to grow by an additional 1.4 bcf/d y/y to 8.0 bcf/d this summer, as the country steps up buying in Q3 19 to handle cooling demand and to restock ahead of the winter.
Even though we expect enough demand for the JKM to retain the title as the preferred destination for US LNG this summer, we still expect absolute JKM prices to follow the TTF down. Outside of China—and to a lesser extent South Asia, where new import capacity in India and Bangladesh drive our projection for import gains this summer of 1.1 bcf/d y/y—Asian demand growth is expected to be subdued. We expect flat LNG imports y/y this summer in Japan, while we project a 0.2 bcf/d y/y decline in South Korean takes.
A hot summer in Northeast Asia could lend upside to regional demand and push Japan and South Korea towards y/y import growth. However, higher non-thermal generation capacity in both countries will shift the merit order, meaning less gas response to CDDs if there is a hot summer. Like Germany, added renewables capacity is blunting gas’s upside in both countries. Japan and South Korea use gas as a peak demand fuel over the summer. But Japan added just under 6.5 GW of new solar capacity in 2018, pushing its total installed solar capacity 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 availability highest in the summer, those capacity additions are likely to mute any potential gas-fired increments.
Nuclear restarts in Japan and fewer plant outages in South Korea will also squeeze gas power burn. Japanese restarts mean nuclear generation will be 2.4 GW higher y/y, while Korean nuclear outages will be lighter to the tune of 2.4 GW of capacity available y/y. These merit order shifts drive our forecast for lower gas demand. Last year saw peak heating season (Q3 18) CDDs 8% and 4% above the five-year average in South Korea and Japan, respectively, meaning 2019 will have to be significantly hotter than that baseline to facilitate higher gas imports.
Even with bearish sentiment across Europe and Asia, neither the TTF nor JKM arb to Henry Hub is likely to close given the abundance of US gas in the face of a projected end-October storage carryout near 3.7 tcf stateside (+500 bcf y/y). This means that all US cargoes will find a home this summer, even as Cameron T1 and Elba Island LNG begin taking significant feedgas in Q2 19.
|Fig 1: European gas storage, bcm||Fig 2: European imports from Russia, bcm|
|Source: GIE, system operators, Energy Aspects||Source: IEA, Energy Aspects|