It may come as a shock to some, but crude oil wasn’t the worst-performing energy commodity in May. Judging by the headline space devoted to it, one would naturally assume no energy commodity could have it worse than crude.
But LNG did, and more pressure may be on the way.
LNG spot prices have been on the slide since April, reaching an all-time low of $1.85 per million British thermal units at the end of May. As with crude oil, the reason was very much the wide gap between supply and demand, already substantial before the coronavirus lockdowns but made even wider than them.
Cargos were canceled, too, notably from the United States to Asia and Europe, with the number calculated at a minimum of 20 cargos for June and July. This dampened demand then pushed gas flows into LNG export facilities to a 13-year-low, suggesting that more pain was on the way.
How LNG is faring in the Covid-19 world is important. It is perhaps more important than how oil is faring. Demand for LNG, according to Reuters reports, was more resilient than oil demand during the lockdowns, possibly because LNG is, among other things, used for electricity generation and that enjoys more stable demand than the transport sector enjoys demand for fuel.
If the coronavirus lockdowns could affect this resilient demand to such an extent as to have analysts talking about all-time price lows and warning about continued volatility, then the bright future of LNG that everyone is anticipating may not materialize in the shape everyone has been expecting. Related: OPEC+ Agrees On Extending Record Output Cuts
For instance, a recently released outlook for the LNG industry projects that the United States will add the largest share of new LNG export capacity over the next five years, at 145.1 million tons per year. It will be followed by Russia, which is expected to add 31.2 million tons of LNG capacity, and Mexico, to add 11.7 million tons per year in new capacity. But will all these additions happen if prices remain weak?
Not all of them will happen, at least not in that timeframe. Tellurian, for example, is already facing a delay for its Driftwood LNG project in Louisiana after its preliminary offtake agreement with India’s Petronet expired. At the same time, another LNG project, Golden Pass in Texas, is boosting its nameplate capacity to 18.1 million tons annually from 15.6 million tons. The Golden Pass facility is currently under construction.
Signals are mixed outside the United States as well. Exxon’s final investment decision for the Rovuma LNG project in Mozambique—one of the emerging hotspots for LNG globally—has been delayed, possibly until next year. The delay is a fact despite Exxon’s securing long-term offtake agreements for gas from Rovuma.
At the same time, its local rival, Total, is about to finalize a $15-billion financing package for its own LNG project in Mozambique. This, according to one of the banks taking part in the financing, is a remarkable achievement in the current market circumstances when everyone is strained for money, and banks are a lot more cautious who they give it to. The $20-billion Mozambique LNG project will add 12.9 million tons of liquefied gas annually to the world’s total production capacity seen at 454.85 million tons annually at the end of this year, up by 24.35 million tons from last year, according to the International Gas Union.
That is, unless prices fall further.
The last week has seen an improvement in prices, and this has driven an improvement in U.S. LNG exports, highlighting the mutual dependence of these two. But the price improvement is not at all certain, especially if the world’s top producer of LNG decides to start a price war, Saudi-style. Related: Morgan Stanley: This Oil Rally Won’t Last
Qatar has been feeling increasing pressure from Australia and, lately, the United States, which have been expanding their LNG export capacity at breakneck speeds, grabbing market share once considered secure. Now, with oversupply persistent and still more LNG export capacity additions on the way, Qatar, according to Bloomberg’s Verity Ratcliffe and Anna Shiryaevskaya, has two options: reduce production to boost prices or boost it and sink prices further to eliminate the competition.
The flooding tactic has worked before, but it has a bad habit of hurting the one deploying it along with its targets. Negative prices are one likely outcome of such a war. Yet, another outcome might be a consolidation of producers into a group that could hypothetically yield price-controlling power over the global LNG market.
Wherever prices—and production—goes from here, the coronavirus pandemic seems to be having a marked effect on yet another segment of the energy industry, highlighting the weak spots along with its strong points. Among the former, there is the over-reliance on Asia, which is by far the largest single source of LNG demand growth. When pandemic killed this demand growth, prices plunged. Yet, the strong point of LNG is that demand for it over the long term will grow, which is why when demand began to recover in the key Asian markets, prices also began to inch up.
ADVERTISEMENT
It is possible that some new LNG projects will be delayed by a year or two until prices stabilize. If they stabilize. The LNG industry has become an extremely competitive place, with arguably too many producers fighting for market share in a persistent low-price environment.
Perhaps a price war is only a matter of time.
By Irina Slav for Oilprice.com
More Top Reads From Oilprice.com:
- Will U.S. Shale Ever Return To Its Boom Days?
- Will Canadian Oil See Any Federal Help?
- OPEC+ Agrees On Extending Record Output Cuts
