Arb shifts again

Published at 17:42 20 Jun 2019 by

Today’s report (week ended 14 June): EIA net change: +115 bcf, EA: +104 bcf

  • While our estimate last week (103 bcf versus EIA 102 bcf) appeared to confirm that our model adjustments following the major misses for the weeks ending 24 May and 31 May were finally in line, today’s print indicates that balances are running even looser. While our flow model saw some upside risk (108 bcf), the miss is still large. As we noted in last week’s Panorama, we believe that underlying industrial demand and Mexican trade are both likely weak. Today’s miss would suggest that baseline production estimates need to be revised higher with potentially higher output in South Central producing regions with low flow data coverage shared with even weaker than anticipated underlying demand.
  • The w/w decline in cash prices was insufficient to pick up incremental power-sector consumption, even with the slightly higher call on thermal generation. Overall load was up slightly, though CDDs were little changed, and wind and nuclear generation were both down.

Next Thursday’s report (week ending 21 June): EA preliminary: +100 bcf

  • Given today’s miss versus consensus, there is risk to the upside for our preliminary estimate. Before the numerous baseline revisions following today’s release, our models had pointed to a mid-90s bcf injection.

Arb shifts again

By the 20th day of every month—which is today—offtakers at Cheniere’s facilities must alert the company if they plan to lift their cargoes. Today’s date would coincide with whether or not August cargoes would be lifted. On paper, the arb to Europe is once again narrowly open for Aug-19 with Henry Hub Aug-19 prices now plumbing the high $2.10s/mmbtu (noon New York time) after today’s EIA inventory release and the TTF Aug-19 contract trading near €10.80/MWh. The arb for September is open by nearly $0.50/mmbtu, but there remains a risk that the arb could close once more. For Spain, given lower transport costs from Sabine Pass, the arb remains open in August by nearly $0.40/mmbtu. To be fair, even if that arb shuts we still expect that US gas will find a home in either Europe or Asia. The paper arb, which includes costs for tanker transport and regasification, might not be factored into every offtaker’s calculation, as many of these costs would be considered fixed/sunk. In addition, these cargoes would likely already have been hedged. Nevertheless, the closing and opening of the arb window on paper does illustrate just how loose global gas balances are. 

Whether one elects to lift (or not) is contingent on a number of factors, including what variety of costs may be considered sunk. The length and degree to which the arb window is closed is also important, as a sustained period of being able to hedge that trade suggests most, if not all, cargoes will be lifted. In addition, the cost (if any) to not accept the cargo must also be considered because if the penalty is high enough, it can change the economics of that decision. Notably, the language in Cheniere’s contracts states that ‘during any contract year, the buyer is obliged to take and pay for the scheduled cargo quantity, or compensate the seller if not taken, unless otherwise excused under the contract.’ If the cargo is cancelled before the cancellation deadline—the 20th day of a calendar month two months before it is to be loaded—there is no cancellation fee though the buyer must still pay the monthly facility charge.

However, a charge does exist if a cargo is cancelled after the cancellation deadline. That charge is based on the Henry Hub price less a value related to either what Cheniere would receive for reselling that quantity of gas back into the US gas market or what it receives for selling it as an LNG cargo or regasified LNG.

Moreover, Europe has to reduce its massive y/y storage overhang to 410 bcf by end-October from 865 bcf (24.5 bcm) now. However, the steep contango currently in the market is actually financially incentivising storage injections. While we expect some of the near-curve contango could evaporate given the physical limits to storage capacity, the open HH-TTF arb for the winter 2019-20 contracts, especially Q1 20, should remain given the ongoing transit dispute between Russia and Ukraine, and uncertainty around the timing of the Nord Stream 2 pipeline’s start-up.

Europe has been the focus of discussion for potential arb windows closing, given just how congested storage in Europe could potentially be. We envision European inventories filling by end-September. The widening differential in East of Suez and West of Suez shipping rates now means a narrower JKM-TTF differential is necessary to entice US volumes to Asia. We expect Asian autumn restocking ahead of winter to support LNG shipments as well.

In the near term, such a narrow global arb is unlikely to shift market sentiment. Our US balances are still calling for a storage carryout near 3.7 tcf. With July fast approaching, our power burn estimate, based on current prices and 10-year normal weather, assumes power burn of 40.5 bcf/d. As such, additional heat or price weakness should not result in estimated gas demand in power shifting much higher. In fact, versus our reference case, the upside for demand in July does appear to have a realistic ceiling near the levels we currently forecast. Given the near-record volumes in feedgas demand flowing into US facilities currently, there is not much room for LNG feedgas demand to move higher than our July estimated values. Higher sustained flows into Cameron LNG or steady volumes into Freeport LNG could move the needle slightly.

The Sur de Texas-Tuxpan system could begin to deliver gas other than the current linefill flows, though the extent to which that will occur with LNG cargoes into Altamira scheduled until end-July is questionable. Maintenance is in the process of coming off at ExxonMobil’s Beaumont facility and the BASF cracker should restart imminently. Altogether, such a fundamental backdrop should not be supportive of an immediate move up in pricing, unless there is extreme heat, which will do more to move sentiment than our forecast burn. However, given today’s miss and the related (and marked) step-down in the futures curve, just a minor hot weather event will not be able to shift much in terms of fundamentals or sentiment.

Fig 1: TTF-Henry Hub arbs, $/mmbtu Fig 2: Weekly EIA storage change, bcf
Source: Refinitiv, Energy Aspects Source: EIA, Energy Aspects

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