As peak summer has passed with only the occasional northeast Asian hot spell, the market for top-up spot cargoes remains stuck in the doldrums. The failure of the TTF-Henry Hub spread to close the arbitrage window for September ahead of the 60-day deadline suggests cargoes from US terminals will continue through Q3 19, even if variable cost margins remain thin.
Europe spent all of Q2 19 importing LNG and injecting it into storage. As a result, the massive y/y storage overhang in the EU that was 25 bcm higher y/y at the start of April was at the same level come the end of June. While July saw reductions in injection rates, European storage levels are nearing levels of fullness where injection rates begin to slow. With storage at 82 bcm near the end of July, and tank tops at 98 bcm, September will have very little capacity left. The rate at which injections can happen will be increasingly limited as we get into August.
The TTF is increasingly being pressured downwards at the prompt. That pressure will only build as the storage outlet is removed, all fuel switch in power is realised, and the European market realises it must curtail supply. While Aug-19 and Sep-19 prices are already reflecting that downward pressure, the September prompt could be subject to even more weakness. The need to curtail supply promises very low TTF prices, potentially down to 3.0 $/mmbtu, where some Russian gas could fail to cover variable costs – and this will drag down the JKM with it to sub 4 $/mmbtu levels. Low September prompt prices will start to pressure October so that even the Q4 19 TTF and JKM curve have a weaker outlook. The coming winter could have a series of low starting flat prices at the TTF and JKM.
Still, Q1 20 prices are being held up due to a concentration of risks for the EU gas market. Outside winter weather, there is additional risk centred on the Russia-Ukraine transit agreement expiring 1 January 2020. If a new transit agreement is not reached, Ukraine has said that Russian gas will not transit the country, locking the gas out of southern European markets. The loss of that much supply—potentially 18 bcm in Q1 20—would cause a run on European gas in storage and push the TTF up quickly, and the JKM up with it. This could help reset EU gas balances, but the high political costs for both Russia and Ukraine suggest an eventual agreement.
While weather risk and material supply reduction risk are likely to remain for Q1 20 contracts, Q4 19 TTF prices could start to come off on near-curve weakness. Given the current thinness in the JKM-TTF spreads for Oct-19 and Nov-19, the JKM is likely to get dragged down with the TTF. Any softness in Q4 19 prices should extend along the curve, although the higher weather risk in Q1 20 winter will mean that contango in that part of the curve should remain. As we go through the winter, normal-weather temperatures would leave global balances loose, and summer 2020 contracts would come under pressure to fall significantly. That weakness in prices would then start extending to contracts for the following winter.
With the global LNG market only showing signs of y/y reductions into the European market coming from Q4 21, there is a very real probability that low global gas prices are going to be sustained for the coming four seasons