Return of Global Demand Sets The Stage for Recovery in U.S. LNG Exports

August 28, 2020
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Only 10 U.S. LNG export cargoes are expected to be canceled in October. Cancellations may finally be easing as global demand shows signs of a recovery. A rally in global prices and widening export arbitrage have provided support for U.S. LNG exports.

Gas flows to U.S. LNG liquefaction terminals have averaged 4.4 Bcf/d in August, before the recent drop in anticipation of Hurricane Laura. This is up from an average of 3.2 Bcf/d in July.

The increased flows are a promising sign for the U.S. natural gas market. In recent months, cargo cancellations have continued to accumulate as global demand has been devastated by travel restrictions and stay-at-home orders due to COVID-19. U.S. LNG cargo cancellations remain an important proxy for gauging the current state of demand in the market as buyers must still pay some fees even if the cargoes are canceled. This suggests that buyers would be reluctant to cancel cargoes, only resorting to cancellations if the cost of absorbing the cargoes would be greater than the fees.

According to a Bloomberg survey, up to 10 cargoes may be canceled in October. This is an improvement from previous months, as the chart above shows. Since the pandemic’s onset, an estimated 165 cargoes have been canceled.

The global rally in natural gas prices has contributed to the reduction in cargo cancellations seen in recent weeks. Since August 1, 2020, the Japan-Korea Marker (JKM) prompt-month prices have risen by $1.465/MMBtu (57% increase) settling at $4.025 on August 25, 2020. In northwest Europe, TTF prompt-month prices have risen by 98c (47%) during the same time and are currently sitting at $3.075. Prices at Henry Hub have risen as well, though to a lesser extent, rallying 69c in August to settle at $2.49 on August 26.

The rally has extended beyond the prompt-month contract. The spreads between the benchmarks have also widened for November delivery. The chart above shows these international spreads expanded as global prices rallied in recent weeks.

AEGIS has long expected cancellations to wane in late September to October because we identified profitable arbitrage starting with the November contract. The Bloomberg survey corroborates our point of view. We expect that in 4Q2020 flows could return to the 7 – 9.5 Bcf/d range, still below the nameplate capacity of around 10.5 Bcf/d, but a material improvement.

We continue to monitor oil, gas, NGLs, regional markets, jet fuel, and interest rates for hedging opportunities. To learn more and see AEGIS opinion and recommendations, go to AEGIS View publications, or contact info@aegis-energy.com. Like what you see? Share this article with the button on the bottom right of your desktop. Market questions or comments? Contact us at view@aegis-energy.com.

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