Oct 01, 2021
– LNG deliveries to Northwest Europe have fallen to their lowest since January, driven by both upstream infrastructure constraints as well as robust demand out of South Korea and South America.
– Platts Analytics base case sees deliveries picking back up into shoulder season, driven by both a rebound in supply and lower temperatures depressing Asian demand, with the recent narrowing of the JKM-TTF MA spread sowing the seeds for this reorientation to begin.
– While Asian demand easing should create room for greater volumes of flexible supply to stay within the Atlantic basin, supply side under-performance, along with persistently stronger weather-driven South American demand, hold the potential to keep LNG volumes delivered into Northwest Europe depressed.
Tightness in the global LNG markets summer-to-date has kept deliveries to the balancing market of Northwest Europe lower year on year, with net deliveries August-to-date sitting at just 46 million cu m/d, down 38 million cu m/d year on year and their lowest mark since Jan’21. This has been a key source of support for TTF price strength, which in turn has lifted JKM to record seasonal highs. If we compare S-21 balances to the pre-COVID S-19 baseline, we can identify two distinct periods in NWE deliveries so far this summer:
1) Q2’21: Global supply was robust (+ 114 million cu m/d), but significant growth in Chinese LNG demand driven by a strong macroeconomic backdrop and low hydro generation prevented LNG volumes arriving into NWE from growing year on year
2) Jul’21-Aug’21: A normalization in Chinese demand growth was offset by reductions in non-US supply due to upstream constraints (Norway, T&T, Nigeria, Peru) and maintenance (Sakhalin), which alongside strong demand out of South Korea and South America, pulled Northwest European LNG imports lower year on year
As we turn to shoulder season (Sep-Nov), Platts Analytics base case sees deliveries to Northwest Europe increasing. This is driven by both stronger supply (+ 71 million cu m/d vs August MTD average) as maintenances end, including at Sakhalin and Peru, and as demand eases across Japan and South Korea. Combining these factors with the subsiding counter-seasonal gas demand in the Middle East and South America should allow for an increase in LNG imports into Europe. Further, while Chinese demand is expected to continue exhibiting year on year growth, the rate of growth has slowed into Q3’21, with the high-priced spot market and slower economic growth both headwinds. This is also true elsewhere in Asia, with record seasonal prices and the relatively flat structure of the curve inhibiting opportunistic spot buying from price sensitive buyers, as well as inducing some gas-to-oil switching at the margin (see last week’s in focus). That said, risk to global LNG balances continues to tilt bullish. Asian buyers remain active in the spot market, with mature NE Asian buyers, especially in South Korea, looking to ensure storages are well stocked heading into winter, while depleted hydro stocks in Brazil could offer further upside to South American imports. On the supply side, extended maintenances or further unexpected outages, including any hurricane induced disruptions to US exports overwhelmingly concentrated in the USGC (see June monthly), remain key risks.
Beyond these fundamentals, market prices also offer an indication for coming NWE LNG imports. The cross-basin JKM-TTF MA spread has been very volatile of late, driven by significant moves in the European market, which has detached from the traditional coal to gas switching anchor and is thus in unchartered waters. Such volatility inevitably makes optimising flexible supply between basins challenging. Despite this, derivatives for Sep’21-Nov’21 remained remarkably flat mid-June through mid-August, before narrowing over the last ten days, a potential harbinger for a reorientation of flexible volumes from the US to Europe. That said, the narrowing will need to be sustained to incentivise supply unwinding and reoptimizing into Europe. Analysis of loadings from non-APAC suppliers, including predicted destinations, points to no evidence of a reorientation of supply back to Europe taking place at present. While volumes on the water heading to Asia from non-APAC suppliers are falling as we move into shoulder season, this is being offset by continued reductions in topline supply, as well as demand strength from South America. The DES NWE – TTF spread is also still trending positive, further supporting a tight outlook for NWE LNG deliveries in the month ahead. Thus, while Asian demand easing should allow for greater volumes of flexible supply to stay within the Atlantic Basin, supply side performance, along with persistently stronger weather-driven South American demand, hold the potential to keep LNG volumes delivered into Northwest Europe depressed.