Low physical prices in Asia illustrate a very weak global gas market, with two trade deals reported below 4 $/mmbtu for delivery in the second half of Q3 19. Those physical prices suggest even narrower spreads to the TTF than suggested by the financial JKM settlements, which should keep LNG heading to Europe. With LNG freight rates rising, the slowdown in LNG imports into EU markets suggests that market participants could be more focussed on trading the JKM M+3–TTF M+2 spread (than the JKM M+2–TTF M+2 spread), which should weigh on JKM prices over the remainder of the autumnal shoulder season and into early winter.
Sub 4 $/mmbtu, sub 40 cents/mmbtu
Reports last week said that sub-4 $/mmbtu deals were being done for late August and September delivered cargoes into Asia. Reports said IndianOil picked up a cargo for 3.7 $/mmbtu from Trafigura and CNOOC bought a cargo for 3.9 $/mmbtu from Vitol. While the JKM financial price did not close below 4.28 $/mmbtu last week, the low individual cargo physical prices suggest that the Asian September market for LNG is very weak. With the JKM-TTF spread having narrowed for what is left of the Sep-19 contracts before expiry and that geographical spread staying below 0.4 $/mmbtu for the M+2 too, the global market is indicating that marginal US and Russian cargoes should be predominantly sent to the EU market.
While prices are indicating that more LNG should be pushed to Europe, imports into the continent actually showed signs of slowing m/m in July, but were still higher y/y. Over July, LNG sendout from EU terminals came in at 6.85 bcm, up by 3.3 bcm y/y but both the lowest absolute level and the smallest y/y increment so far in 2019. August started with port receipts a touch lower y/y last week and receipts are set to be flat y/y in the week to 9 August. Our forecast for the first two weeks of August suggests that LNG imports in August could be the lowest for any month so far in 2019. Scheduled receipts into NW Europe for the first half of August are only higher by 0.3 bcm y/y, vs the average 2.4 bcm y/y increase in the first half of every month since January.
Despite LNG supply growth into Europe slowing, global supply is still increasing. Kpler data put the rolling average of LNG supply into the global market above 7.1 Mt per week at the end of July, the highest average since December 2018.
While those numbers could be revised downwards, it still points to strong supply, with exports from Cameron LNG, Corpus Christi T2 and Prelude all starting to ramp up and global train maintenance looking light. Sabine Pass T3 and T4 are both going off for maintenance this week and Sabine Pass still has two storage tanks that it cannot use due to a gas leak issue dating back a year or so that has yet to be fully rectified, so further sequential increases in global LNG supply are probably unlikely until September.
Our long-standing assessment has been that flows into the EU would drop as we moved into Q3 19 as NE Asian buyers always increase imports in peak summer and tend to add spot purchases for any sustained periods of hot weather. Average imports have increased in Japan, at 1.4 Mt per week at end of July vs 1.1 Mt per week in May, but those numbers are still lower in y/y terms. In South Korea, average imports are sequentially higher, but more or less back in line with last year’s. Only China has shown a bit more growth in peak summer, with weekly average imports at their highest (at around 1.2 Mt per week) since January, which is higher y/y by around 0.1 Mt per week. Those buying patterns were against a background of weather in NE Asia in June and July that was not that supportive of much incremental gas buying.
Weather forecasts for NE Asia now suggest that much of the rest of August will be hotter than normal. While this is likely to lead to a bigger run on LNG stocks than if the weather was near average, particularly in Korea and Japan, any replacement buying is only likely to start showing up in late September or October. However, with there being a gap between the physical and financial markets for Sep-19 contracts, the upward pressure on Asian prices from the forecast temperatures is likely to be minimal. This is particularly the case as August 2018 was hotter than normal, so CDDs on a y/y basis for both China and South Korea are slightly down over the 14-day forecast period to 20 August. Only in Japan will there be a boost, with CDDs set to be 17% higher y/y.
Given that we still expect NE Asian demand to disappoint to the downside and that supply will be strong, the question is where is all the LNG—particularly some of the cargoes being trans-shipped in Europe—actually going? The JKM-TTF geographic spreads on the M+2 contract are not supporting any cross-basin trade. However, the JKM M+3-TTF M+2 timespread is much wider—the TTF Oct-19–JKM Nov-19 spread is at 1.44 $/mmbtu—and the consistent contango across the curves for contracts delivering over the rest of 2019 support sending US gas to Asia, although even that 1.44 $/mmbtu does not support European reloads. While LNG freight rates from Fearnleys show no change w/w, Affinity charter rates were up by about 8,000 $/d over the last two weeks to an average of 66,000 $/d, which takes the breakeven spread for US cargoes to Asia to 0.9 $/mmbtu but takes the cost of an EU reload up to 2.85 $/mmbtu.
Good news for PNG developers
The FID for the 8.1 Mtpa PNG LNG expansion had taken a setback when Papua New Guinea’s new government decided two weeks ago to reopen the commercial agreement for development and operation of the PRL 15 (Elk-Antelope) for the Papua LNG Project. The PRL 15 field is intended to feed two of the 2.7 Mtpa trains that are part of the expansion project. In early August, the new petroleum minister said that the government had agreed in principle to honour the signed agreement, while adding it reserved its rights to discuss a shortlist of issues with the developers. Once the sides (including Total, ExxonMobil and Oil Search) reach a final agreement on fiscal terms with the government, a similar deal on the P'nyang gas field—which will feed another of the 2.7 Mtpa trains—can be finalised, which would then pave the way for an FID. The development partners have been targeting 2020 for an FID and getting the gas agreements with the government approved will put the project back on schedule.
|Fig 1: JKM-TTF timespreads, $/mmbtu||Fig 2: LNG imports into Europe, Mt per week|
|Source: CME, Energy Aspects||
Note: x-axis is week numbers starting 31 Dec 18 Source: Kpler, Energy Aspects