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Why Europe's Gas Glut Is Worsening

Europe could import some 100 million tons of liquefied natural gas this year as many cargoes turned down by Asian buyers head for the continent, Reuters has reported, citing energy analysts.

Last year LNG imports to Europe reached 85 million tons, an all-time record at the time. Yet it seems that depressed demand for LNG in Asia—a key market for the blooming industry—will drive this year’s intake by European countries substantially higher, with 78 cargoes of excess LNG coming from Asia into northwestern Europe.

The problem is that the European LNG market is already oversupplied. Last year, the Gate Terminal in the Netherlands, which takes in a lot of the LNG coming into the continent, said it processed a record 171 LNG carriers in 2019. It seems a lot of the LNG remained in storage, sparking concern that soon Europe will not be able to handle the unwanted LNG of Asia, not least because of unseasonably warm weather that has pressured already lackluster demand further.

This state of LNG fundamentals has already driven prices low. The November and December spot price for LNG in the Netherlands averaged some $3.95 per million British thermal units. It was the lowest for this time of the year since January 2004, Reuters noted in a report. But as the glut deepens, traders expect prices to fall further, to $2.4 per mmBtu later this year.

“There is less room to inject gas in storage this summer and a lot of coal to gas switching has already taken place,” an Energy Aspects analyst told Reuters.

European authorities have approved the construction of new LNG import terminals but these have yet to be built, so capacity is indeed already stretched. If the warm spell continues, some LNG production terminals might need to shut down.

The first to be hit by the European glut would be U.S. LNG producers, according to Natural Gas Intel, if they can redirect the gas to the domestic market, which is also in an excess supply situation.

The situation for U.S. LNG producers specifically is made additionally complicated by China’s still standing 25-percent tariff on LNG imports from the U.S. Reuters last week quoted Freeport LNG’s chief executive Michael Smith as saying local producers could not afford to sell their LNG to a country that has a 25-percent tariff on the commodity.

Smith was commenting on the fact that China has restarted negotiations with U.S. LNG producers regarding future LNG purchases under the Phase 1 trade deal Beijing inked with Washington earlier this month. Under that deal, China undertook to buy an additional $18.5 billion worth of U.S. energy products but with the 25-percent tariff on LNG still active, LNG might not end up among these energy products.

“Importantly, should mild weather or stronger than expected LNG deliveries in NW Europe continue to the point that they would add another 2 Bcm to storage…the market would have to move lower to look for the next lever of adjustment, arguably the curtailment of US LNG exports,” Goldman Sachs said in a note earlier this week. “At current US gas forward prices, we estimate this would be tested with TTF and JKM moving $0.60/mmBtu and $0.80/mmBtu lower from here.” 

Europe is turning into the final destination for a lot of LNG and its storage facilities are filling up. What will happen when they do fill up, with spring and summer—seasons of lower LNG demand—coming? Prices will fall even lower, possibly to a point where some production becomes uneconomical. With the right circumstances, this year could see a smaller, LNG version of the oil price crash of 2014.

By Irina Slav for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on February 03 2020 said:
    This could be a temporary snag for LNG made worse by the outbreak of coronavirus in China. How much LNG will suffer depends overwhelmingly on how fast China will be able to contain the outbreak.

    Still, there is a silver lining in the form of the movement to de-commission nuclear power and coal in electricity generation particularly in Japan and Germany and a hopeful continuation of a trade truce between the United States and China as well as the global energy transition in which gas and LNG will act as the pivot.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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