With the long march of LNG new supply continuing and prices staying resolutely low, albeit a little higher than in mid-April, the demand side is starting to show some response. That better demand response, combined with some price pressure coming from NBP/TTF prices being supported by an extension of the European heating season, has helped global prices drift upwards. However, Northeast Asian prices are still no higher than about 4.5 $/mmbtu.
Chinese imports have been strong over the first four months, up y/y by 1.2 Mt, driven by a combination of colder weather this year and the effects of the reduction in city gate gas prices in November 2015. With the heating season now largely done, it is less clear if summer temperatures will be hot enough to stimulate sufficient power demand to offset the increases in solar power capacity. Even if they are, we expect the growth of Chinese LNG demand to slow.
India has also been a strong performer so far this year, up by almost 1.5 Mt, with delivered spot LNG prices low enough for the economy to use. Subsidy policies have helped, but the market is doing most of the work to make gas competitive in the power sector. But Kochi and Dabhol still lack key infrastructure to allow higher utilisation, and India wants LNG cheap.
Meanwhile, evidence is emerging that low prices are now starting to influence demand side investment decisions in other parts of the world. Sri Lanka, Hawaii, and Bangladesh have all emerged as candidates for FSRUs.
Low prices could also start to support demand from Japan, although that only means smaller y/y reductions than we have been previously expecting. Japanese generation companies could realise coal-to-gas switching when more nuclear units are returned to power. As such, LNG declines could be smaller than were seen in response to the return of the two Sendai units. We now forecast Japanese demand will fall by 2 Mt y/y in 2017, compared to 3.2 Mt previously.
While incremental demand is slowly coming into view, the steady march of new supply continues. The 5.2 Mtpa Angola train is loading a cargo, the first 5.2 Mtpa train at the monster Gorgon project is starting up with a view to next exports in June, and exports are expected from the 1.2 Mtpa PFLNG plant in July, as it has left the ship yard and is on its way to Malaysia.
The coming summer should also see the start of the 4.5 Mtpa second train at Sabine Pass in the US (July) and the 3.9 Mtpa second Gladstone train in Australia, which is expected to have a slow ramp-up due to source coal seam gas limits. The only new delay has been to Train 9 at the Petronas MLNG project, which we push back from July 2016 to January 2017.
With US Henry Hub prices at 2 $/mmbtu and global LNG around 4.5 $/mmbtu, the arb window between the US and the world remains wide open. Along the Henry Hub curve, the arb with Asia (LNG at 4.5 $/mmbtu) begins to close in December 2016 as Henry Hub is priced around 3 $/mmbtu. At price levels above 3 $/mmbtu, gas from the US Gulf Coast would be unlikely to find many markets where it could sell large volumes. The arb stays open longer for Cove Point, on the US East Coast, as it can access to gas at least at a 0.5 $/mmbtu discount to Henry Hub.
We have raised our 2016 summer LNG price forecasts due to increases in our NBP/TTF prices. For summer 2016, we now expect Northeast Asian LNG prices to average 4.1 $/mmbtu (up from a previous forecast of 3.65 $/mmbtu).