Oil prices are on the mend, but the global market for liquefied natural gas continues to wallow in oversupply.
A wave of export capacity came online in 2019, leading to a downturn in prices even before the pandemic hit. Now, there is so much LNG sloshing around the world that exports from the United States have suddenly declined.
The pandemic has sapped demand for heating, electricity and industrial use, dragging down demand for natural gas worldwide. Seasonal LNG demand this summer is expected to decline for the first time since 2012, according to Wood Mackenzie. A recent estimate from Rystad Energy puts supply growth at 17 million tonnes this year, with demand growth only totaling 6 million tonnes.
Exporting any LNG not already under contract is not even remotely profitable at the moment.
Spot prices for LNG in North Asia – the JKM marker – traded at $2.10/MMBtu in early June, tied for an all-time low. Notably, Nymex prices in the United States are trading at roughly $1.80/MMBtu, meaning that after factoring the cost of liquefaction and transportation, exporting any LNG not already under contract is not even remotely profitable at the moment.
Much of the gas trade is conducted under fixed contracts at higher prices, insulating exporters to some degree. But buyers have increasingly begun to cancel contracted cargoes, opting to pay a penalty instead of purchasing the gas. While 31 U.S. LNG cargoes arrived in Asia in May, only 10 are currently slated to be delivered in June, according to Reuters. For July, around 45 LNG shipments from U.S. terminals have already been cancelled.
“As global markets remain weak, we have had customers elect to cancel some additional cargoes,” Cheniere Energy’s CEO Jack Fusco said on a first quarter earnings call in early May.
Gas hubs in Europe are now being closely watched by analysts because inventories could fill up later this summer. In reality, they probably won’t actually fill to the brim because prices will be forced down in advance to reflect that surplus and deter more cargoes from arriving in Europe. “In the shorter term there is real risk that conditions may be set to allow negative prices in Europe, but only in the very short term,” Guy Smith, head of gas trading at Swedish utility Vattenfall AB, told Bloomberg.
LNG is now the worst-performing energy commodity in the world.
LNG is now the worst-performing energy commodity in the world, down two-thirds year-to-date. But as prices crash, the impact is arguably felt most acutely by U.S. LNG exporters, according to Goldman Sachs, which estimates that around 4 billion cubic feet per day (Bcf/d) of American gas exports will be cancelled this summer.
Not only are low prices in Europe and Asia a painful development for American LNG exporters, but exporters elsewhere could reroute cargoes from Europe to the United States, making it a dumping ground for surplus LNG after storage in Europe fills up. For instance, LNG cargoes from Trinidad have been arriving in the United States at a higher-than-normal frequency, according to Goldman Sachs.
Shale gas takes another hit
Cancelled exports means that the market is also curtailing the volume of gas flowing from American shale gas fields to export terminals. “[W]e believe [summer 2020] US gas prices need to move lower to incentivize incremental [coal-to-gas] substitution,” Goldman Sachs analysts wrote in a June 3 note to clients. The bank slashed its price forecast for Nymex natural gas prices to $1.75/MMBtu, a cut of 35 cents from its previous estimate.
The market has soured to such a degree that U.S. utilities switching from coal to gas may not be enough to absorb all the gas. Without an export route, and with utilities only using so much, surplus natural gas would have nowhere to go. At that point, “US gas production shut-ins would be required this summer, pushing Henry Hub below $1.40-$1.50/mmBtu,” Goldman analysts warned.
Gas output in Appalachia reached a temporary peak last year, and has begun to decline. The declines could continue as prices deteriorate. The EIA expects gas output in Appalachia to fall by another 85 million cubic feet per day in June, compared to a month earlier. Complicating matters further, any revived oil drilling in the Permian will add even more associated gas to the mix.
The global LNG market suffers from booms and busts just as the oil market does. But the market for LNG is much more clunky, done in a more unorganized fashion. There is no OPEC for LNG. Instead, the market goes through multi-year price cycles, and the rebalancing process can be protracted.
The last wave of investment occurred years ago, and a big tranche of those projects came online in 2019. Even before the pandemic, analysts had already predicted that there would be a period of soft investment, but the now the surplus could take years to absorb. For example, ExxonMobil recently delayed a final investment decision on its massive $30 billion LNG export project in Mozambique, after expecting to pull the trigger on the project this year. On June 3, Mozambique’s National Petroleum Institute told Reuters that the investment would come in 2021 “in principle,” leaving open the possibility of further delays.