U.S. LNG Cancellations Mount, Keep Pressure on Summer Gas Prices

May 29, 2020July 28th, 2020
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As global demand for LNG struggles, U.S. liquefied natural gas producers face a wave of cargo loading cancellations. Global natural gas stockpiles are growing as demand suffers from the viral pandemic. Summer gas prices are likely to stay under pressure until more seasonal demand returns this fall with cooler weather.

LNG exports have been the largest source of natural gas demand for the U.S. in recent years. That demand has been put at risk this summer. Less gas is being burned globally. There has also been a global LNG supply glut that appeared even before the coronavirus took over our lives. Answers to many questions surrounding LNG exports and U.S. natural gas prices depend on timing. Global demand is expected to continue to return throughout the rest of 2020 as populations return to more normal activities and Fall demand naturally increases as we head into winter. This summer might be tough for U.S. gas prices, but we believe most of the downside is already priced into the market for summer.

The Summer ’20 strip has slipped over 35c since early May

All active U.S. LNG terminals could get a total of 35-45 cargoes canceled for July loading, a higher number than what was scrapped from June, according to traders surveyed by Bloomberg. Cancellations of U.S. LNG cargoes makes sense for many buyers this summer, even with long-term contracts in place. The coronavirus has caused demand worldwide to sink, causing natural gas inventories to pile up around the globe.

Right now, it is unprofitable to ship LNG from the U.S. to Europe or Asia, even when considering sunk costs. One destination market, the Dutch price TTF, is currently BELOW Henry Hub (HH). The chart to the right shows TTF (medium blue line) under HH (green line) for the entire summer gas strip (July-Oct). The TTF-HH spread doesn’t become positive until November when winter demand arrives in the northern Hemisphere. The story between HH prices and the Japan/Korea Marker (JKM) is much the same. It is currently unprofitable to ship an LNG cargo to Asia from the U.S.

Many LNG buyers must give LNG producers a 60-day notice if they intend to cancel a cargo, according to reported terms for Cheniere customers. This is why we hear notices in May of cancellations for July.

U.S. gas price is higher than the European benchmark.

Source: Bloomberg

The chart above shows the decline of LNG flows from the U.S. year-to-date, according to Bloomberg estimates. Exports peaked in late March at nearly 10 Bcf/d, before declining to 6.3 Bcf/d on May 29. Exports are unlikely to climb from their current levels as long as demand remains depressed and destination locations are priced uneconomically to the U.S. In fact, its possible that LNG shippers could send cargoes to the U.S. as it is currently at a premium to Europe and other locations closer to the Lower 48. This oddity would hold even more true if summer natural gas prices were to rally here in the U.S., making shipping certain spot cargoes to the U.S. more attractive.

We continue to monitor oil, gas, NGLs, and regional markets 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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