Low natural gas prices from Europe to Asia, ample supply amid more than sufficient storage, and weaker demand growth this year have combined to create a perfect storm in the global liquefied natural gas (LNG) market.
The LNG glut is already seen in Asian spot prices, which have been falling for five weeks in a row-an unusual price movement just ahead of the winter season in the northern hemisphere. Weighed down by a wave of new supply from the United States, Australia, and Russia, LNG prices in Asia are now down by more than 40 percent from this time last year.
With prices weak and demand tepid, some of the U.S. LNG exports may have to be curtailed when winter ends, analysts and investment banks say.
In addition, U.S. LNG exporters are currently at a great disadvantage in one of Asia's key LNG growth markets-China. Due to the U.S.-China trade war, no U.S. LNG cargo has arrived in China since March 2019, according to Reuters data. The March cargo was one of just three to China this year. Before the trade war and before China slapped tariffs on U.S. LNG, the Chinese imported as many as 25 U.S. cargoes in the first half of 2018 alone.
U.S. LNG exporters are confident that their gas will continue to find buyers around the world, even in the current glut. But a growing number of analysts believe that some U.S. exports may have to be shut in next year as global supply, including from the U.S., continues to grow, while demand will be even weaker when winter ends. Related: Did Oil Really Save The Whales?
In this way, the U.S. could be forced to play the role of the swing supplier on the LNG market, analysts tell Bloomberg.
According to Citigroup and Morgan Stanley, U.S. LNG exporters may be forced to shut in both production and exports in the second or third quarter next year, as prices could plunge after the winter to levels that will be unprofitable for U.S. producers to export. Morgan Stanley doesn't rule out that around half of the current U.S. LNG exports could be curtailed in Q2 and Q3 next year, if weather is typical for the seasons.
But U.S. LNG exporters tend to disagree with that assessment. Asked about potential lower utilization of capacity to rebalance the oversupplied market, Jack Fusco, president and CEO at Cheniere Energy, said on the Q3 earnings call:
"[I]t never ceases to amaze me that we keep getting this or having a conversation of the U.S. LNG in the part that customers won't lift because we are extremely competitive worldwide."
Yet, earlier this month, Pavilion Energy, a Singaporean buyer of a U.S. cargo LNG, canceled the loading of the cargo but will still pay for it, as both Asia and Europe struggle with the LNG glut. Some other customers of U.S. LNG cargoes are also reportedly considering paying for those cargoes but not loading them, traders have told Reuters.
"While this fits a broader 'tight/closed arbs will lead to USG LNG shut-ins' narrative, this has as much to do with freight mismanagement (at the customer level) as softer LNG prices," Webber Research Advisory said, commenting on the cargo cancellation.
Prices indeed are much softer this year, compared to last winter. Related: US Refiners Reduce Crude Processing For First Time Since 2009
LNG prices in Asia and natural gas prices at the Dutch gas hub Title Transfer Facility (TTF) are almost half the level they were at this time last year.
Storage in Europe is full, as low LNG spot prices amid abundant supply and weaker Asian spot demand have helped Europe to fill its storage tanks to more than average levels this summer.
In Asia, milder weather in the world's top two LNG importers-Japan and China-leads to weaker demand amid ample supply. Last week, Asian LNG spot prices for January delivery dropped to US$5.70 per million British thermal units (MMBtu), down by US$0.20 from the previous week, market participants told Reuters.
While the lower LNG prices create some demand in India, for example, overall demand in Asia this winter is certainly not growing at the record-breaking pace of the past three years. The reason-supply is more than enough, as new volumes continue to come out of the U.S., Australia, and to an extent, Russia.
Even if prices in Asia and Europe rebound in the next three months in peak winter, the possibility of a price slump going into the spring could force U.S. exporters to withhold volumes from the market, becoming swing suppliers.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. More