The Henry Hub-TTF arb for Aug-19 was narrowly open on paper once more in July, and the arb widens progressively on the Sep-19 and Oct-19 contracts, reinforcing our view that no US LNG trains will be shut in this summer. As cargoes will likely have been hedged previously, the daily freight rate may be a sunk cost for many industry participants. Our Henry Hub price outlook for the remainder of the injection season is 2.25 $/mmbtu, on expected limited US demand growth and our forecast end-October storage carryout of over 3.7 tcf. That translates to an end-March 2020 carryout near 1.6 tcf, which should pressure winter prices to 2.52 $/mmbtu.
Henry Hub gas prices fell by 6.8% from 1 June to 30 June, to 2.33 $/mmbtu, to encourage power sector gas demand and prevent storage overfill. Higher-than-normal cooling load is offsetting the bounce-back in gas hub prices over the first half of July, and hot weather will likely help July reach all-time highs in monthly and daily gas burn in the US. We expect that gas consumption in power will be roughly flat y/y for the balance of the summer, but gas prices may need to be lower in September–October to incentivise higher burn and divert gas from storage.
Regarding pipeline trade with Mexico, the Sur de Texas-Tuxpan pipe was announced as mechanically complete on 11 June, and minor volumes flowed through the pipe as commissioning was announced on 20 June. However, an arbitration request brought by CFE against the pipe developers on 24 June has meant Sur de Texas-Tuxpan has not started commercial operations, and the delay could be lengthy. Thus, cross-border flows to Mexico may remain capped near current levels of 5.2-5.3 bcf/d. CFE has tendered for a flat volume of cargoes y/y into Altamira until end-July.
In terms of industrial demand, new Gulf ethane crackers are taking in feed, but none ramping up or coming online in Q2 19 (Shintech, Westlake/Lotte, Indorama) are world-scale, and they will only push up incremental demand narrowly. Our balances indicate industrial demand growth y/y of 0.1 bcf/d for the remainder of this injection season and of 0.2 bcf/d in the 2019–20 heating season as new ethane cracking capacity comes online. A potential slowdown in global economic activity and competition from a buildout in global steam-cracking capacity pose ongoing downside risk.
For this injection season, timing risk on new US trains has somewhat dissipated. For Freeport LNG, FERC reporting showed that construction activities at the facility were still active. The facility only resumed taking in limited monitorable flows in the past few days. For trains slated to come online this upcoming heating season, we do not rule out potential timing risk given the construction status at Freeport LNG and Cameron LNG’s request (and approval) from FERC for an extension to place its facilities in service. Corpus Christi T2 continued the run of on-schedule Cheniere projects with the export of its commissioning cargo in early July, and the facility is currently running both trains close to full capacity. Our balances assume LNG maintenance in October offlines one generic US train for a full month.
The next notable step-up in sequential US production growth will be at the close of the injection season and start of heating season 2019-20, when the 2.0 bcf/d Gulf Coast Express is set to enter service and allow production to rise. Rumours of a potential early start-up to Gulf Coast Express persist, and an early start-up could boost output higher than our current production forecast. Our balances include average injection season production growth of 8.3 bcf/d y/y, easing to near 5.0 bcf/d y/y over the heating season. Notably, we have seen a considerable slowing of permitting activity across major gas basins like Appalachia and Haynesville.
Our reference case does not see US LNG exports choked off this summer given an open JKM-TTF arb, which only gets wider for contracts for delivery in late summer and early autumn. Henry Hub prices will remain pressured thanks to end-of-season inventories that are looking fuller with each passing month, so the US arb to global hubs can only widen so far. US gas prices will be weighed on by caps on both demand from the power sector and exports to Mexico, while domestic gas production should pick up as the injection season ends.
|Fig 1: US injection season 2019 y/y change, bcf/d||Fig 2: Henry Hub to JKM and TTF arb, $/mmbtu|
|Source: Energy Aspects||Source: Refinitiv, Energy Aspects|