With summer effectively over for the LNG market, the focus on the market is turning to winter. The global gas market is still in the grip of robust supply growth. JKM front-winter prices are now 7 $/mmbtu lower y/y. While there is always potential upside from cold winter weather, the downside continues to dominate.
The wave of incremental LNG supply is going to continue to come from the 33.2 Mtpa of new capacity that is expected online at the start of this October compared to a year earlier. Of that capacity, almost 23 Mt is from the US terminals that have started production in the last year. The addition of all those new trains mean that we forecast that global supply is going to be up y/y by 17.0 Mt over the coming winter, with 8.9 Mt to come from US-based terminals.
Balancing that additional supply will be a challenge as NE Asian demand growth has slowed this year. The all-important Chinese appetite for LNG has been dented by the trade-war induced economic slowdown denting industrial production growth and by a greater y/y increase in domestic gas production. For the coming winter, the high terminal utilisation in winter 2018-19 and the low amount of added regasification capacity (just 2.5 Mtpa) in the interim suggests regas constraints will be an increasingly important limiting factor in import growth. We forecast Chinese imports will grow by a comparatively low 3.2 Mt y/y over winter 2019-20.
A reversion to normal winter weather does hold out the promise of a weather-driven demand response in Japan, with that country adding 2.6 Mt of imports y/y. While the outlook for Korea is less supportive of winter demand growth, South Asian imports should add some 3.7 Mt y/y to demand on new import infrastructure in India and persistently low LNG prices. Adding in the rest of Asia gives a total of 9 Mt of incremental demand y/y over winter. With demand growth in the rest of the world looking very low, this does suggest around 8 Mt of incremental supply is likely to be available for the European market.
The European gas market is getting pushed to breaking point due to oversupply and would need a helping hand from very cold winter weather and a significant disruption to supply to balance this winter. While both of these risks are present and are helping to support TTF Q1-20 prices, a colder European winter on its own might not be enough to allow the market to absorb all of the additional supply that we expect will be available. The European market is going to start the withdrawal season with some 15 bcm more y/y in accessible storage, while pipeline supply could potentially add even more supply than last year. Add in almost 12 bcm of additional LNG supply and Europe will either need to see a considerable turndown in supply or it will end the heating season with a record high amount of gas in storage.
If European storage levels stay high on the expected buoyant supply through the end of the year, then the TTF Q1-20 and Sum-20 could come under pressure to fall in price. Over the coming two seasons, the JKM is likely to continue to follow the TTF, with a widening JKM-TTF spread only likely if NE Asia has a colder-than-normal winter. Q1-20 could fall towards 15.1 €/t (4.9 $/mmbtu) and a JKM-TTF spread of, say, 1.1 $/mmbtu would take JKM pricing to near 6 $/mmbtu for the peak Jan-20 and Feb-20 contracts. This, in turn, will depress Sum-20 prices, holding out the potential for Q2-20 prices to fall and close the arbitrage window between Henry Hub and the JKM/TTF.