Any peak summer strength that the LNG market might have been anticipating for the Aug-19 contract looks to be muted for now, as the weakness at the TTF is going to continue through the rest of the summer. With TTF prices still having some downside, the JKM is still showing signs of being happy to follow lower, although this could continue to be at a slower pace as the summer-winter spread shows some attractive arbitrage potential. Over the last few weeks, the LNG market has seen widening freight rate differentials between the Atlantic and Pacific basins, and given this could be structural, it could start to shift the economics of spot trade flows. Vessel hires in the Atlantic now command a 25,000 $/d premium over Pacific ones, narrowing the JKM-TTF spread required to get US volumes going to Asia.
Although the JKM continued its general pattern of following the TTF down, some relative strength that we have been anticipating made a rare, albeit faint, appearance last week. As a result, the JKM-TTF spread widened modestly, with the Aug-19 and Sep-19 spreads moving to levels that clearly keep US flows eyeing up the Asian market, around 80–90 cents/mmbtu. The Oct-19 and Nov-19 JKM-TTF spreads still display a real oddity, as mentioned last week, of trading extremely narrow. The JKM did regain some premium in those contracts, closing last Friday at 50 cents/mmbtu to the TTF, a 10-cent w/w gain. Given these are early winter months contracts, relative prices have usually been associated with a seasonal widening of the JKM-TTF spread, so the low level of these spreads is still unexpected.
Part of the narrowness could be to do with the steep contango in the TTF market, driven by the current heightened winter risks that market is facing surrounding issues of Russia and Ukraine pipeline transport. Also, given that spread narrowness has persisted for a couple of weeks, it suggests there is a lot of LNG currently being hedged at the JKM over those months—peak summer cargoes are being bought and then sold into the upcoming winter. Given there is a very steep near summer-winter contango in both the TTF and the JKM curve, we expect an increasing amount of LNG is being arranged to go into floating storage. The JKM Sep-19-Nov-19 arb closed Friday at 1.48 $/mmbtu, and we estimate the costs of floating LNG for two months would be around 80 cents. The only thing that is a little perplexing, is that over the last two weeks daily LNG tanker freight rates have been falling and that softness in freight is not overly consistent with a large number of tankers being secured for that floating storage play.
Growing basin freight differentials narrow spreads
Over the last two weeks, freight rates for LNG tankers have actually started to come down, while the last two months has seen a widening of inter-basin rates for LNG tankers. According to Fearnleys data, global average freight rates have fallen by 6,500 $/d to 42,500 $/d, while the inter-basin differential is at 25,000 $/d—West of Suez (WoS) chartering is at the premium to East of Suez (EoS) chartering. The WoS premium results from demand being still dominated by Asia, so that far more empty ships end up in the Pacific Basin after delivering cargoes. A premium is then needed to get some of those empty ships to come back into the Atlantic Basin, and the increase in the loading of Atlantic Basin cargoes—both US and Yamal volumes—has caused a wider premium to emerge and persist for a while. As three US trains are on the verge of moving to regular exports—the 4.0 Mtpa Cameron T1 that exported its first cargo at the end of May, the 4.5 Mtpa Corpus Christi T2 that was reported this week of producing its first LNG and is expected to export a first cargo in July, and the 4.4 Mtpa Freeport plant, which was reconfirmed for a start of exports in September—those basin differential could be very slow to narrow.
The implication of these wider inter-basin freight differentials for natural gas price spreads is that they would still support US flows going to Asia at much narrower JKM-TTF spreads than if freight prices were more equal between the basins. Pricing at a global average freight rate would mean that the breakeven JKM-TTF spread for US cargoes to have equal incentive to head to NE Asia or to Europe is currently at 0.6 $/mmbtu. With freight rates at a 25,000 $/d differential, the breakeven spread falls to 0.17 $/mmbtu. Any wider than that, US cargoes would consistently prefer to head to Asia.
Tanker attacks raise Middle East shipping premiums…but impact so far small
While Middle East exports (from Qatar, Oman, and the UAE) potentially benefit from the EoS freight discount, the voyage costs for cargoes from those sources could be set to go up. Insurance costs for ships sailing through the Middle East have been reported to be increasing by at least 10% following attacks on two oil tankers in the Gulf of Oman last Thursday. This follows attacks on four tankers near Fujairah in mid-May. All ships have a variety of insurance, including annual war-risk cover as well as an additional 'breach' premium when entering high-risk areas. These separate premiums are calculated according to the value of the ship, or hull, for a seven-day period. Oil tanker insurers have been reporting that the biggest vessels sailing through the Gulf area face additional costs of up to $200,000 for a single seven-day voyage (in and out of the high-risk zone). If we add a similar premium onto a Qatari LNG cargo, we estimate that the impact would be to increase the delivered cost of the gas to NE Asia of some 5 cents/mmbtu. If there are any further attacks, those premiums could go far higher. That would particularly be the case if an LNG tanker were directly affected.
|Fig 1: JKM-TTF Oct and Nov-19 spreads, $/d||Fig 2: Middle East exports, Mtpm|
|Source: CME, Energy Aspects||Source: Bloomberg, Energy Aspects|