International price collapse restricts US liquefied natural gas exports

• DOI: http://doi.org/10.1111/oet.12801
• Published date: 01 June 2020
• Date: 01 June 2020

GAS AND POWER

International price collapse restricts US liquefied natural

gas exports

Weak prices in Europe and Asia are making US gas rela-

tively expensive, which is choking off US liquefied natu-

ral gas (LNG) supply.

At the beginning of May, short-term US natural gas

contracts traded above European and Asian benchmarks

for the first time ever, as they plunged to record lows,

which is leading to far lower US exports than had been

expected this year. By late May, the situation was little

changed, with June and July gas prices trading below

10 p/th ($1.30/mn Btu) in the United Kingdom, com-

pared to around $1.86/mn Btu in the United States

(HH) and $1.80 to 2.00/mn Btu in Asia-Pacific LNG mar-

kets, making it uneconomic to export from the United

States.

US exports have also been backed out by logistical/

demand problems associated with the Covid-19 virus,

especially in Europe, where Wood Mackenzie expects

17.6 bcm of demand (about 6%) to be lost in Q2 across

the seven largest gas markets: Germany, United King-

dom, Italy, France, Spain, Netherlands, and Belgium.

The number of vessels carrying US LNG peaked at 74 in

January, according to federal data. Latest data from

Refinitiv show this fell to 62 in April and was on track to

drop to an eight-month low of 50 in May. US exports will

suffer more than pipeline supplies due to low costs and

stiff competition for market share war between Russia

and Norway, although at the end of May there were signs

that Russian flows were falling sharply too as storage in

central Europe quickly fills.

US exports cannot compete at current European or

Asian prices, particularly with US prices holding up, and

another 45 LNG cargoes scheduled to be exported in July

have been canceled, according to S&P Global Platts. At

least half the reductions are from the largest US exporter,

Cheniere Energy, which said that there had been an

increase in the number of cargoes for which its customers

will not take delivery, adding that it expects new project

investment worldwide to drop sharply this year and next.

Looking ahead, there is little doubt that a lengthy

period without any US LNG arrivals will eventually

tighten the European and Asian markets. Indeed, by end-

May, Asian prices were showing signs of edging up on

higher demand, including from China (see below). But

Europe remained weak, and with storage being filled

with cheap gas the downward pressure is also being felt

on forward prices. However, there could be some support

in Europe from an early opening of the Norther Sea

Route from Russia to Asia, which will reduce the flow of

Russian LNG.

In the United States, prices are likely to remain on

the firm side, due to lower associated gas production as

shale drillers cut back on expenditure and shut-in wells

amid record low oil prices. In addition, gas demand is

holding up relatively well in the United States so far.

Flows from Norway into Europe could also see some

impact from the oil supply cuts, although most of

Norway's gas is not associated. Similarly, other major

LNG exporters, including Qatar and Australia, do not

produce associated gas and will not be affected by the

OPEC-plus cuts—although some cargoes have been can-

celed due to low prices, and maintenance has been

brought forward.

In Europe, as gas prices collapsed over recent weeks,

power prices have not fallen as quickly, which has wid-

ened the spark spread, benefitting gas-fired generators

and supporting demand—although rising renewables

output has more than offset this, shrinking gas' share

overall. Gas prices began to fall around mid-October last

year, when the spark spread was about £3/MWh and

power prices were about £50/MWh—that widened to

over £10/MWh at the beginning of May, when power

prices were about £36/MWh. Once gas prices start to rise

again, power prices in Europe should follow them higher,

although lower demand associated with coronavirus,

combined with an ever-rising portfolio of renewables

across the continent is tending to work against this, and

may help squeeze the spark spread for gas as it edges

back up, especially with upward pressure on carbon

prices.

1|CHINA RECOVERY

China's gas demand is recovering fast and should almost

match year-ago levels for the second quarter, which has

kept LNG imports up, providing some support for the

weak Asian market. Demand in March was already at

similar levels to 2019, and while total gas imports were

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