With the LNG market moving towards its period of being structurally long supply capacity, the expected change to buyers’ behaviour is beginning to happen. JERA (a joint venture between TEPCO and Chubu), looks increasingly like a commercial entity. In a clear sign of the times, it announced that it was no longer going to accept destination clauses in new supply contracts.
Given this, the reload market is looking ever more anachronistic. The economics of reloading depended on two things: restrictive destination clauses, which stopped straightforward diversion of LNG from occurring, and wide spreads between regions that allowed the costs associated with reloading to be recovered. Now those spreads have narrowed substantially, it is hard to see reloading keeping a meaningful role in the market.
Elsewhere, CNPC is reported to be asking for a revision to the pricing formula in its contracts with Qatargas. The worrying thing for producers is that the spread between hubs and contract prices—while starting to widen as LNG prices continue to fall and Brent adds value—is not as wide as we expect it to become. Given that we expect LNG prices to stay low and Brent to keep drifting up in H2 16 (from its current $45 per barrel), and as the spread between the contracts and spot widen, buyers that hold contracts are likely to have an increasing appetite to renegotiate. The market will see lots of tension, but this should initiate what is likely to be a gradual and painful process to remove oil indexation from the global gas market.
The much anticipated increase in supply is still ticking over. The first train at Sabine Pass appears to be close to commercial operation, while the AP LNG and Gladstone trains that started in Q4 15 now appear to be operating at full tilt. The much beleaguered Angola LNG Train is also reported to be back producing, with exports to start early May, and even Idku (Egypt) somehow managed to produce a cargo in what was one of the most unexpected supply side developments the market has seen in a while. On the downside, the first train at Gorgon developed an outage, which has slowed its commissioning down by up to two months.
With supply on its way, one important trade-flow related development is that the inauguration date for the expansion of the Panama Canal has been confirmed for late June. The expanded canal will have the capacity to serve LNG tankers, opening up a more direct route between liquefaction facilities on the US Gulf of Mexico (GOM) and the Asian LNG market. The canal will reduce journey times from the GOM to Northeast Asia by around a third when it opens, and with quoted transportation costs already down to around 1.30 $/mmbtu, that would take transport down towards 1 $/mmbtu. The arb window will therefore stay open longer.
With the current movement out of the northern hemisphere winter into the much more mild Q2 period (albeit with Europe having a bit of winter extension), moderating demand amongst the biggest importers makes it is hard to see any upside for global gas prices during the coming two quarters, even with the delay to Gorgon. The potential for a very hot Q3 16 is the main upside risk, alongside any further delays to new trains.
Our forecast prices have been left largely unchanged. For summer 2016, we expect Northeast Asian LNG prices to drop to an average of 3.65 $/mmbtu. As we argued last month, sub-5 $/mmbtu prices for LNG spot should now be seen as the new normal, and, with some markets already seeing sub-4 $/mmbtu prices, the global age of gas demand is well and truly underway.