Squeezing the TTF

Published at 09:31 16 Jul 2019 by . Last edited 11:18 22 Aug 2019.

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Two consecutive weeks of TTF gains have provided support for JKM flat prices but have tightened the JKM-TTF spreads across the curve. Still, the European fundamentals have not materially changed, with storage levels still high and supply—both LNG and pipes— still robust y/y. We still think the TTF will need to price down to at least 3.8 $/mmbtu to balance, and that should help bring the JKM down with it. With current forecasts for the remainder of July pointing to a milder period in NE Asia, late summer restocking demand should be muted, and with global LNG supply still at very high weekly levels, the underlying theme of global gas is bearishness. We still think the floating storage play could begin to tighten up freight markets, and that is likely to be the most bullish driver left for the JKM-TTF spreads before the onset of winter.  

TTF bull run squeezing global spreads

While global gas prices are still weak, the TTF has recorded two consecutive weeks of price gains, adding a good 1.1 $/mmbtu back to prices. TTF balances still look soft, and that move up in gas prices has been driven by a short squeeze in the coal market, some short covering in the gas market, and sequential drops in pipeline supply caused by planned and unplanned outages. The sudden jump in TTF pricing has not been fully followed by the JKM, with JKM-TTF spreads narrowing across the curve and the Aug-19 spread narrowing to 14 cents on the verge of expiry. Even the Dec 19 JKM-TTF spread has dropped to 0.7 $/mmbtu, the level where we assess the US marginal cargoes as indifferent between heading to Europe or Northeast Asia. The spreads for the remainder of contracts for 2019 delivery are all less than 0.8 $/mmbtu, which is very tight and continues to promise considerable incremental LNG into the European market for the remainder of the year.

Still, the weak global prices are a function of the healthy supply we continue to see coming into the market. According to Kpler data, the average level of weekly supply over the last four weeks is just above 7.0 Mtpw, a return to the high levels seen at the turn of 2018–19 in peak winter. The potential for deeper maintenance has yet to really affect production levels this summer, with the lowest four-week moving average at 6.6 Mtpw. Even the current week, with Hurricane Barry rolling into Louisiana over last weekend, is unlikely to have any material impact on supply; feedgas into Sabine Pass was depressed from 10–12 July due to the storm but is already back to normal levels. With Cameron flows unaffected by Hurricane Barry, the ramping up of Cameron’s first train should continue throughout the summer.  

Will the latest TTF bull run be sustained? With the underlying balances still loose, as storage is filling far too quickly and both LNG and pipe supply is coming in at robust levels, the answer looks to be a no. The issue with the latest surge in TTF prices is that it increased the relative price of gas against coal, taking Aug-19 to 4.4 $/mmbtu at Friday’s close, which is back above the 5% fuel switch trigger. This will make it even harder to get injection rates down, so the rise in gas prices looks unsustainable. We still think that the gas market should be pricing forward contracts far closer to the parity trigger at 3.8 $/mmbtu.

While the TTF has risen, so has Henry Hub, jumping on some hot weather forecasts, although in Monday trade the Sep-19 contract dropped back below 2.4 $/mmbtu. At prevailing current prices, the Henry Hub–TTF Sep-19 spread is still at 2.16 $/mmbtu, keeping that arb window wide open. 

Reloading and the storage play

One of the developments we have remarked on is the diverting of cargoes from Europe despite the lack of a convincing cross-basin spread (see Global LNG Panorama, 2 July 2019). Certainly, the developments we continue to see are transhipments of Yamal cargoes, with most of these being done at Montoir, although it is not abundantly clear where these transhipped cargoes might end up. While some cargoes are still transhipping through Europe, in the last fortnight we have seen a number of cargoes sent through the northern sea route direct to Asia. While this still remains a high-priced route, the difficulties of getting Yamal to Asia via Europe when the JKM-TTF arb no longer supports that trade are likely why the direct route will see more use.

Still, we need to see Asian demand pick up, but that does not seem to be supported by the NE Asian summer. The remainder of July is forecast to be very mild, with Chinese CDDs down by 19% y/y and Japanese and Korean CDDs looking to be 35% lower y/y.  Without any summer heat, LNG inventories will not be drawn down, and any late-summer restocking build will stay low. Also, some of that potential restocking buying could already be done using the floating storage play that has been supported by the wide contango extant for most of the summer in both the JKM and TTF curves. While it is hard to get a handle on how many ships might be currently tied up as floating storage, Refinitiv currently estimates that as 12 vessels—around half the number seen at the peak of last autumn.

Still, as it is early for the floating storage position to be taken physical—a Sep-Nov arb is more likely—it is hard to know exactly how long those vessels will be held as storage. With more contango this year than last in the summer-winter spreads, we should see more ships used as floating storage, and that should eventually start to put upward pressure on freight rates and on the JKM-TTF spread. Until that happens, we think the global market will soften as the TTF sells downwards, and spreads will stay relatively narrow.  

Fig 1: JKM-TTF spreads, $/mmbtu Fig 2: European storage levels, bcm, y/y
Source: CME, Energy Aspects Source: GIE, System Operators, Energy Aspects

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