Autumnal surprise

Published at 11:17 9 Jul 2019 by . Last edited 11:18 22 Aug 2019.

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With the TTF moving modestly up on a jump in coal prices and some gas supply outages, a muted response from the JKM saw the spreads between the two gas hubs narrow across the curve. That narrowing did lead to the JKM-TTF Oct-19 and Nov-19 spreads dropping below 40 cents/mmbtu again. Those spreads seem very narrow for what is typically a period when Asian buyers tend to be in full stockbuilding mode. While that may be explained by floating storage plays, it feels like those spreads will need to widen, particularly if there is a seasonal increase in freight prices. Still, the buoyant supply picture will get another fillip with last week’s first exports from the 4.5 Mtpa Corpus Christi project, which will help rein in some of the seasonal increase in prices as we go into winter.

October and November spreads – still narrow

A persistent oddity along the curve is the narrowness of the JKM-TTF spreads in the autumn and early winter months this year. Those spreads narrowed again last week, partly driven by an increase in TTF prices that was not matched at the JKM. It is the 30-40 cents/mmbtu spreads in the Oct-19 and Nov-19 contracts that are the most eye-catching and compare to around 60 cents/mmbtu in the Sep-19 spread. Given average global daily freight rates, we estimate that the JKM needs to be 55 cents/mmbtu above the TTF for US cargoes to head to Asia instead of Europe. Certainly, the narrow autumnal spreads point to a relatively weak amount of buying at the JKM for those contracts, which deliver when Asian buyers tend to be in full-on stockbuilding mode for the imminent peak winter. In turn, that lacklustre buying could be driven by lower incremental demand expected by NE Asian buyers or by the presence of already booked Asian floating storage, which would most likely be sold into those two contracts. Despite weak cross-basin spreads, the timespreads are still reasonably high, with Sep-19–Nov-19 JKM yielding 1.38 $/mmbtu, still above the 0.9 $/mmbtu that we estimate would be needed to pay for 60 days of floating storage.

While floating storage bookings may be a feature of the market, freight rates have actually softened over the last two weeks, with global average rates dropping from 49,000 $/d at the start of June to 39,000 $/d last week, according to Fearnleys. Although freight rates have dropped, the Atlantic premium for hires are still quite high at 22,000 $/d—and this does have implications for the US loading breakevens. If we factor in different freight rates for the Atlantic arb and the Pacific arb, the JKM would only need to be 20 cents/mmbtu above the TTF for US cargoes to favour Asia rather than Europe.

In 2018, freight rates were already considerably higher by this point in the summer (at 67,500 $/d), but notably accelerated in August and September when floating storage charters really started to appear. We think that we will still see some ramp-up in LNG freight rates this summer, but the base rates on which that will happen are lower, suggesting the outright extent of any coming rise will be less extreme. As such, while pressure on the peak winter JKM-TTF spreads to widen will rise with freight rates, spreads are unlikely to need to get as wide as last year.  

Corpus online on time

In contrast to a number of this year’s other new liquefaction terminals, the first commissioning cargo from the 4.5 Mtpa Corpus Christi T2 was exported last week, right in line with our expectations. With T2 now going to begin the process of building up to commercial start-up in a couple of months, the only new US trains still expected to come online this summer are the 4.4 Mtpa Freeport LNG facility and possibly the first of the micro trains (0.25 Mtpa each) at the Elba Island project. Once these two projects reach first export, all of the first wave of US LNG export projects (2014-2019) will have begun operating.  

Retail price increases poorly timed

While global gas prices have stayed low for delivery over summer 2019, there have been moves to increase the price of natural gas for consumers in both Pakistan and Egypt. Pakistan's Oil and Gas Regulatory Authority (OGRA) increased domestic natural gas prices by up to 200% on 1 July to demonstrate to the IMF fuel subsidies were being unwound as the country looks for around a $6 billion loan to stave off its balance of payment crisis. OGRA has now announced three increases in fuel costs since Imran Khan became prime minister in August 2018. The government said the gas price increases will help ease a $1 billion deficit accrued by the state-owned natural gas suppliers Sui Northern Gas Pipelines and Sui Southern Gas Company. Gas tariffs in the power sector have gone up from just under 4.0 $/mmbtu to 5.2 $/mmbtu. While still broadly in the money against fuel oil in the power stack, the general increase in gas prices across all of Pakistan’s end-users could well slow some of the increases seen in Pakistani gas demand. This may eat away on the edges of Pakistan’s demand for LNG, but low prevailing global LNG prices simply mean Pakistan can buy more LNG that it otherwise could afford. Given its overall energy deficit, we still expect Pakistan to buy 1.3 Mt more LNG over H2 19.   

Egypt also introduced its latest round of fuel subsidy cuts, raising domestic prices by up to 30%, as part of its compliance with the IMF-backed economic reform programme. Reports suggest that the price of cooking gas cylinders rose by 30% to 65 Egyptian pounds for domestic use and 130 Egyptian pounds for commercial use. While most fuel prices are now in line with their costs, the government is still subsidising fuel for bakeries and power generation, both of which are heavily reliant on natural gas. With tariffs on both liquid and gaseous fuels going up, the relative competitiveness of gas should be largely left unchanged. As such, fuel switch away from gas is unlikely to significantly dent domestic gas demand. However, higher fuel prices in general could lead to some demand-dampening. Domestic demand reductions in Egypt would in turn potentially allow more feedgas to be provided to LNG liquefaction trains. The main barrier to that remains the ongoing contractual dispute over the 5 Mtpa Damietta facility which has meant the Damietta plant has not yet been able to start operations, unlike Idku.

Fig 1: JKM-TTF spreads, $/mmbtu Fig 2: Pakistan’s retail gas prices, $/mmbtu
Source: CME, Energy Aspects Source: OGRA, Energy Aspects

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