Incremental LNG supply is on track for growth of around 15 Mt y/y in Q2 19 despite no new terminals exporting yet in 2019. Growth in supply is well above the rise expected based on new additions in capacity in 2018. Augmentation of the supply side has been driven by a number of factors, including the returns of exporting trains that had run out of feedgas (Egypt), other trains increasing feedgas as pipe exports slow (Algeria) and some exporters simply just exporting more y/y (Malaysia, Oman and even Qatar), possibly due to shifting maintenance dates.
While the strength in supply in Q2 19 has really been exceptional, we expect supply growth to ease to a still-high 9.2 Mt y/y in Q3 19. The slower growth rate does assume heavier train maintenance in Q3 19 than in Q2 19, and comes despite expecting new capacity to begin exporting. The 4.0 Mtpa Cameron LNG project is nearing first exports, and the 4.5 Mtpa Corpus Christi and the 4.4 Mtpa Freeport LNG project should both start exports over Q3 19. Even our very high forecast export growth for Q3 19 could be conservative and any upside to that will be extra supply going to Europe.
Against this wall of supply, demand has been mixed, with indications of slowing Chinese end-user demand the biggest concern. That slowdown in Chinese demand needs to be watched. Only South Asia seems to be raising demand in response to lower prevailing JKM prices.
With the LNG market in the grips of that supply wave, LNG prices continue to be driven by Europe’s very weak TTF. The month of May finally saw another downward repricing of the TTF, as the last vestiges of cold weather and early summer heating demand ended in Europe. Without that last residual heating demand to hold up the market, prices promptly fell in relative terms. To balance this summer, the EU market will need to slow gas injections into storage and to do that the TTF will need to price more gas into power.
The TTF in the first half of May had been pricing in relative terms at a level above where gas-fired plants with just a 5 percentage point efficiency advantage over a coal-fired plant would be in the money (the 5% fuel switch trigger). That 5% trigger is now pricing around 4.3 $/mmbtu and both Jul-19 and Aug-19 are trading below that level. The next significant trigger is the parity trigger, where gas-fired units with no efficiency advantage are in the money against coal-fired plants. At that point, the EU gas market will achieve all of the coal-to-gas switch that is technically available, which over the summer would add some 8-10 bcm of additional gas demand. The parity trigger is now at 3.6 $/mmbtu.
A 3.6 $/mmbtu TTF price has implications for the arbitrage window between the TTF and Henry Hub. The variable costs of liquifying and moving US LNG from the Gulf Coast to NW Europe is around 1.3 $/mmbtu given current freight rates. A 3.6 $/mmbtu TTF price would only provide a netback to a US exporter of 2.3 $/mmbtu, effectively closing the arb window by making that trade uneconomic at prevailing Henry Hub prices. While the arb window could well close in Q3 19, it is really August loadings that are at risk, as lifting decisions for July are already complete and Sep-19 to Dec-19 contracts have sufficient contango to keep the arb window open for a longer period. Also for September, the start of Asian restocking for winter should be enough to keep the JKM-Henry Hub arbitrage window open, particularly if it follows a hot peak summer, and keeping that arb window open will need around a 2 $/mmbtu JKM-Henry Hub spread.