Q2-20 export arb at risk of shutting

Published at 16:42 9 Sep 2019 by . Last edited 17:42 9 Sep 2019.

Oversupply, lacklustre demand and bearishness continue to dominate global gas markets. We think this trend will continue into 2020. We expect global supply to be up by 4.5 bcf/d (17 Mt) y/y over winter 2019-20 but LNG demand growth to be weak. European storage should be full by end-September, which will destroy injection demand in October—this prospect is already weighing on European Q4-19 prices. Q1-20 contracts have risk premium priced in, but these contracts could crash if the winter is mild or if Russia’s Gazprom reaches a transit agreement with Ukraine to avoid a disruption to gas flows into Europe from January. We think a transit deal is likely. In addition, y/y growth in Chinese LNG imports has been easing, although there should be pockets of growth in demand from South Asia and Japan. The otherwise overwhelmingly high LNG supply suggests the Henry Hub export arb to the TTF and JKM could close for Q2-20.

TTF and JKM curve prices have roughly halved y/y and the TTF D+1 contract hit a 13-year low of $2.35/mmbtu (€7.2/MWh) in early September. On 6 September, the TTF Jan-20 contract closed at $6.72/mmbtu and the JKM Jan-20 closed at $5.71/mmbtu.

The global gas market is still in the grip of robust supply growth. We expect 4.4 bcf/d (33.2 Mtpa) of new capacity to be online at the start of October versus a year earlier. Around two-thirds of that capacity is from the US terminals that have started production in the last year. The addition of new trains mean that we forecast that global LNG supply will be up by 4.5 bcf/d (17.0 Mt) y/y over the coming winter, with 2.3 bcf/d (8.9 Mt) to come from US 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 weighing on industrial production growth and by a larger y/y increase in domestic gas production. For the coming winter, a lack of regasification capacity will be an increasingly important limiting factor in Chinese import growth. We forecast Chinese imports will rise by a comparatively small 0.8 bcf/d (3.2 Mt) y/y over winter 2019-20 (see Fig 2).

Weak demand elsewhere will mean more LNG y/y for Europe. However, European markets are near breaking point due to oversupply. There was just 204 bcf (5.9 bcm) of available storage capacity left in Europe at the start of September and we expect storage to reach maximum capacity by the end of September, leaving no injection capacity in October.

The volume of Norwegian flows will be a significant factor in determining how fast storage fills. A continued turndown in Russian flows is likely to be another key factor to get the market to balance in the coming two months.

We forecast the European market will start the withdrawal season with 530 bcf (15 bcm) more gas in storage y/y. In addition, there could be more pipe supply y/y and almost 423 bcf (12 bcm) of additional LNG supply over winter. Europe could end the heating season with a record-high amount of gas in storage unless there is a turndown in supply or a much colder-than-normal winter.

The TTF Q4-19 contract has fallen due to this bearish outlook. The Q1-20 contract has not dropped by as much as Q4-19 due to the risk of cold weather this winter and an ongoing dispute between Russia and Ukraine about a new transit agreement for gas flowing to the EU via Ukraine. If a deal is not reached, 640 bcf of Russian supply to Europe could be lost in Q1 20—and it is that risk that is supporting the prompt–Q1-20 contango. The Russia-Ukraine dispute is the bigger of the risks currently supporting the Q1-20 contract, but we think the two sides will reach an agreement for gas to flow this winter. Q1-20 and Sum-20 TTF contracts could collapse in price if any of the following things happen: an agreement is reached and gas flows as normal through Ukraine to the EU; there is a mild winter; European stocks are high at the end of 2019.

The JKM is likely to continue to follow the TTF over the coming two seasons. The JKM-TTF spread is only likely to widen if NE Asia has a colder-than-normal winter. The TTF Q1-20 contract could fall towards €15.10/t ($4.90/mmbtu) and a JKM-TTF spread of $1.10/mmbtu, which would be wide enough to get US gas to Asia, would take JKM pricing to near $6.00/mmbtu for the peak Jan-20 and Feb-20 contracts. As winter prices fall, the promise of a historically high end-winter storage carryout in Europe will begin to depress Sum-20 prices, leaving the potential that the arbitrage window between Henry Hub and the JKM/TTF closes as early as Q2-20.

The summer-winter contango earlier in the year has encouraged floating storage plays, and that summer-winter arbitrage is likely to be behind some of the current price weakness. We expect the number of vessels being used for floating storage to grow over the coming weeks as the Sep-19–Dec-19 arbitrage comes into physical play. Companies may also slow vessels down in order to capture higher prices later in the winter given steep contango in near-curve prices, further increasing demand for shipping capacity.

There are regional pockets of potential demand growth for LNG. Imports in Japan could grow by 0.7 bcf/d (2.6 Mt) y/y over the winter if there is a reversion to normal winter weather after a warm winter 2018-19. South Asian imports should grow by 1.0 bcf/d (3.7 Mt) y/y due to new import infrastructure in India and persistently low LNG prices, which will continue to attract buyers in India despite growing global macroeconomic weakness. We expect import demand in all of Asia should rise by 2.4 bcf/d (9 Mt) y/y. But this will not be enough to absorb all the new supply, which suggests 2.1 bcf/d (8 Mt) of incremental supply will be available for the European market over the heating season, which will be a bearish driver for global gas prices.

Fig 1: European gas storage, tcf  Fig 2: China LNG imports, bcf/d
Source: GIE, system operators, Energy Aspects  Source: China Customs, Energy Aspects
Fig 3: Japan LNG imports, bcf/d Fig 4: India LNG imports, bcf/d
Source: Ministry of Finance Japan, Energy Aspects Source: PPAC, Energy Aspects

Log in to download

Other North America publications

Q3 19 results – Slow-motion growth

Published 18 hours ago

2019-11-18 Natural Gas - North America - Q3 19 results – Slow-motion growth cover
Earnings calls for US gas producers for Q3 19 results pointed to continued gas production gains,..

Read more

Rig report

Published 3 days ago

No cover
Within this report you will be able to review the latest figures published by Baker Hughes by gas..

Read more

Short sweater

Published 4 days ago

2019-11-14 Natural Gas - North America - Short sweater cover
Today’s report (week ended 8 Nov): EIA: +3 bcf, EA: -3 bcfTo align with today’s number, we lowere..

Read more

Lower 48 gas storage

Published 6 days ago

2019-11-12 Natural Gas - North America - Lower 48 gas storage cover
This report includes our forecast for the next two EIA Weekly Natural Gas Storage Reports. We als..

Read more