Glut of JKM-bound prompt cargoes threatens US feedgas rebound

New York — As global LNG import prices near annual highs this month, a narrowing spread between the Platts JKM prompt and forward-swap contracts could pose a risk to the nascent recovery in US feedgas demand.

On Aug. 13, the prompt-month Platts JKM was assessed at $3.65/MMBtu, or it's highest since mid-January, amid growing uncertainty over near-term cargo availability in Northeast Asia.

Since the start of this month, the September contract has gained nearly $1/MMBtu. Over the same period, though, the October and November swap contracts have climbed only about 70 cents and 50 cents, respectively, S&P Global Platts data shows.

As the premium on mid- to late-autumn cargo deliveries declines, traders and portfolio players could be incentivized to offload cargo volumes earlier, rather than slow-steaming to the region's premium destination ports.

Earlier this summer, a steep forward price contango had resulted in a steady buildup of floating LNG vessels at sea, as many opted to pay additional, but comparatively low, daily charter rates and boil-off costs in an effort to capture higher forward-market prices. In mid-July, the number of floating LNG vessels globally climbed to over 25. In June, the number was estimated around 10-15, S&P Global Platts data shows.

US feedgas

As the number market players looking to float cargoes declines in response to the weakening price contango, a glut of prompt supply arriving in the JKM market could put renewed downward pressure on import prices there – just as US LNG production and exports are ramping up.

On Aug. 13, US feedgas demand was estimated at over 4.5 Bcf/d – up sharply from mid-July levels below 3 Bcf/d, data from S&P Global Platts Analytics shows. In September, fewer cargo-lifting cancellations are expected to add more fuel to the rebound in US feedgas volumes. Next month, total cancellations are estimated at 26 – down from June, July and August when monthly cancellations totaled between 40 to 45 cargoes.

Assuming the rally in JKM prices continues, US cargo schedules for October – due to be reported later this month – could show another steep drop in loading cancellations, further lifting US feedgas demand.

Alternatively, a precipitous drop in prompt-month JKM prices could have the opposite effect – boosting cargo cancellations at US terminals and zapping the nascent rebound in feedgas volumes for October.

Supply risk

A narrowing contango in the JKM forward market hinges on concerns over near-term supply from Chevron's three-Train Gorgon LNG export facility in Western Australia.

In late May, a routine inspection at Train 2 revealed issues in the unit's propane heat exchangers. The production train was subsequently taken offline and is now scheduled to return to service on Sept. 12, according to market sources.

Earlier this month, though, Australian safety regulators issued notices to Chevron requesting inspection of the propane heat exchangers at Trains 1 and 3, to be carried out by Aug. 21. It remains unclear whether, or for how long, the two trains could be shutdown for the ordered inspections or whether repairs could be required.