Northwest European near-curve prices falling in recent days is driving up demand for LNG shipping. The contracts have weakened relative to Asian LNG markets, which will encourage more Atlantic basin spot cargoes to be sent longer-distance to Asia. And the near-curve contango has deepened at the TTF, increasing the incentive to use vessels for floating storage. Our expectation of further weakening in the TTF Oct-19 and Nov-19 prices could further boost shipping demand in the coming weeks.
The TTF Oct-19 market dropped to 3.86 $/mmbtu by 2 September, from 4.06 $/mmbtu on 26 August. Prices for physical delivery to India in the second half of October held steady w/w around 4.25 $/mmbtu and the JKM Nov-19 market edged higher to 5.7 $/mmbtu by 30 August—the last price available—from 5.65 $/mmbtu on 26 August.
The differentials in the second half of August had already favoured sending West African spot supply towards the Indian market ahead of Europe. The JKM Nov-19 premium to the TTF has in recent days increased further above the additional shipping costs for sending US Gulf Coast cargoes to Northeast Asia compared with sending them to Europe. The JKM Nov-19 market was at a 1.6 $/mmbtu premium to the TTF Oct-19 contract on 30 August while the additional shipping costs to Asia are around 0.84 $/mmbtu.
We see potential for the European markets for Q4-19 delivery continuing to soften, given there is limited storage capacity left for injections over September and October, which will cut aggregate demand y/y. The UK Met Office also predicts a high probability of mild weather in October-November, which could curb heating demand y/y in the early winter months.
Despite Norway’s Equinor reducing some production from its 120 mcm/d capacity swing Troll field and European buyers cutting their imports of Russian and Algerian gas y/y, the TTF Oct-19 contract has trended lower in recent weeks. The TTF Oct-19 price is already pricing in much of the incremental demand from the power sector switching to gas from coal, and the pressure on the TTF to price in any remaining fuel-switching potential is likely to still see TTF prices drop further.
The growing weakness at the prompt saw the TTF D+1 contract tumbling to 2.52 $/mmbtu (7.85 €/MWh) on Monday, the lowest D+1 price since 3 October 2006.
New Asian buying interest holds up spot prices
Buying interest from the price-sensitive South Asia market appears strong for October, supporting Q4-19 prices in the region. Indian buyers have so far sought 13 cargoes through tender for October delivery, which would be well above spot demand in October 2018 and the highest for any month so far in 2019. Pakistan LNG is expecting to close a 10-cargo tender on 5 September, the highest number of monthly cargoes it has sought this year.
Northeast Asian spot prices were supported by new buying interest from China’s Guangzhou Gas on 2 September. The company tendered for three deliveries over October-December. Chinese buying will likely not attract US cargoes—tariffs mean no US cargoes have been sent to China since March. But Chinese buying will support demand for other cargoes from the Atlantic basin. We expect a jump in Chinese LNG import demand in October to 7.4 Mt, from 6.3 Mt in October 2018, based on growth in recent months. There is headroom in Chinese regasification capacity to support this y/y increase in October, although y/y rises later in the winter will be capped by regasification capacity reaching maximum utilisation.
Northeast Asian LNG demand in the coming months will be also be boosted by Japanese buying, as companies have held lower terminal stocks over the summer than recent-year averages. Stocks are especially down y/y, as Japanese buyers had secured supply for winter 2018-19 early to avoid paying similarly high spot prices to those during winter 2017-18.
Asian premium and contango to support freight rates
The Northeast Asian market gaining competitiveness against Europe for Atlantic basin supply, companies using vessels for floating storage and the ramp-up of US output will all drive up aggregate demand for shipping and may support further increases in freight rates.
Asia attracting more US supply will boost shipping demand substantially next month. A US cargo shipped to Japan or Korea through the Panama Canal requires around 23 days of transit based on a cruising speed of 17 knots, while it requires around 12 days for shipment to northwest Europe. US facilities already require more shipping capacity per tonne of LNG exports than most other global export facilities given their distance from the main buying markets.
Firms may also slow vessels down in order to capture higher prices later in the winter given a steep contango in near-curve prices, further increasing demand for shipping capacity. The JKM Oct-19 was at a discount of 0.94 $/mmbtu to Nov-19 and a discount of 1.73 $/mmbtu to Dec-19 on Monday (30 August). These spreads are enough to cover the short-run cost of using a dual-fuel diesel electric (DFDE) carrier of around 0.76 $/mmbtu per month.
Given the contango at the TTF and in Northeast Asian markets, there is ample incentive for holding cargoes in floating storage in both the Atlantic and the Pacific. Kpler cargo-tracking data showed five vessels as floating storage on 3 September, with three of these in the Atlantic basin.
The contango in TTF near-curve prices may have prompted Austrian utility OMV to use the Marshal Vasilevskiy carrier for storage near the Netherlands’s Gate terminal. The vessel loaded on 15 August and has held position near the terminal since then. Freeing up space at the terminal allowed for subsequent deliveries to take LNG storage at Gate close to capacity. LNG stocks hit 0.35 bcm on 28 August, which was just below capacity of 0.37 bcm. We expect the vessel to return to its long-term charter as Gazprom’s floating storage and regasification unit at Kaliningrad in November to provide winter cover.
Some US-loaded cargoes also look like they are being used as storage for deliveries later, with the Maran Gas Delphi on 3 September still in a holding pattern off Spain’s Huelva terminal after loading from Cheniere’s Corpus Christi on 7 August. The Marvel Eagle, which also loaded from Corpus Christi on 17 August, was holding around the Gulf of Mexico. Holding this position would give it the option to go to Northeast Asia or Europe for delivery later.
Output from US export facilities is continuing to ramp up, with growing exports from Cameron LNG and Corpus Christi’s second liquefaction train increasing shipping demand. Freeport LNG is also loading its first cargo, onto the LNG Jurojin, which arrived on 30 August.
Spot freight rates for DFDE vessels remain considerably below last year’s peak in November 2018 of around 190,000 $/d for East of Suez. The East of Suez rate on 2 September of 66,000 $/d has risen from a low earlier this summer of 48,500 $/d and was in line with freight rates at the same time last year. While a return to 195,000 $/d might be off the cards, we do expect to see further gains in freight rates in the coming months helping to put pressure on the JKM-TTF spread to widen.
|Fig 1: US Gulf Coast exports, Mt/week||Fig 2: JKM prices, $/mmBtu|
|Source: Kpler, Energy Aspects||Source: CME, Energy Aspects|