A flood of new natural gas supplies and weak winter demand have pushed LNG prices in Europe and Asia to record lows, ushering in a year that could test the market's ability to consume exports from the U.S. that are hitting record highs.

The price and oversupply picture has spurred increasing concern among LNG industry observers that profits, or netbacks, will weaken to the point that off-takers of U.S. LNG decide to cancel cargoes or that shipments from U.S. facilities will be curtailed by shut-ins or protracted maintenance.

The Platts Japan Korea Marker, the benchmark price for spot-traded LNG in Northeast Asia, fell below $4/MMBtu on Jan. 23 for the first time in 10 years, according to S&P Global Platts.

In Europe, which played a critical role in absorbing new supplies in 2019, gas inventories are high, and margins have weakened for selling spot U.S. LNG cargoes at the European benchmark, the Netherlands' Title Transfer Facility, or TTF, hub price.

"What you get is a price that is today really close to not covering your variable costs," said Jason Feer, head of business intelligence at oil and gas ship broker Poten & Partners. "We're not quite there. But if you look at it today, basically what it shows is you don't recover any of your liquefaction fee, and you are giving up a lot of freight ... You are barely in the money."

At spot prices below $4/MMBtu, U.S. LNG plants are operating at cash costs, and below that level, shut-ins should be expected, Sanford C. Bernstein & Co. analysts wrote in a Jan. 29 note to clients. Bernstein analysts said prices are unlikely to drop much lower, but the outbreak of a new coronavirus in China adds to the uncertainty because of its potential to slow down gas demand in China, the world's fastest-growing LNG importer.

U.S. exporters themselves might be fine if shipments from U.S. terminals are curtailed, and large-scale shut-ins of U.S. export capacity are unlikely, market observers said. Most U.S. LNG production capacity is covered by long-term take-or-pay agreements, and a significant portion of U.S. exports is tied to counterparties that have long-term deals with end-users of the LNG or that are end-users themselves.

But expectations of a supply glut and low prices could add to challenges for LNG terminal developers trying to secure enough commercial support to advance new projects to construction.

The flood of LNG supplies is due to startups of new export facilities led by the U.S. and Australia. Most of the startups over the last year have happened in the U.S., which now has six major LNG export terminals operating. Additional gas liquefaction units are in the late stages of construction at Freeport LNG Development LP in Texas and at the Sempra Energy-led Cameron LNG facility in Louisiana.

"By the middle of the year, it will be over, however, and between the end of this year and 2024, very little incremental supply will reach the market," Bernstein analysts said. "This will give rise to a significant tightening of the market and should result in a recovery in spot LNG price, which will have positive implications for European gas prices and potentially coal prices for the winter 2020/21."

But canceled cargoes could trigger a further drop in onshore U.S. natural gas prices that recently fell below $2/MMBtu, market observers said.

Analysts at Goldman Sachs in a Jan. 27 note to clients estimated the threat of curtailments would be tested if TTF and JKM prices drop by $0.60/MMBtu and $0.80/MMbtu, respectively, to prices that would be below what Goldman Sachs forecast for the winter or summer. Such decreases would pressure NYMEX gas prices down in "a race to the bottom that would end at U.S. cash cost levels around $1.50/MMBtu to $1.90/MMBtu," the analysts said.

"It won't take many cargo cancellations to have an impact on price," Poten & Partners' Feer said in an interview. "You would see markets react to that signal. Because that really means that you just can't make money putting that into European storage. That would mean that you just can't find somebody willing to pay you a couple of cents to move that into Japan or Korea or China. That's really a signal that you don't have places to put it."

A potential backstop could be domestic U.S. coal-to-gas switching, Bank of America commodity strategist Clifton White said. This could result in structural long-term natural gas demand and could reduce U.S. carbon emissions, he said.

Commodities researchers at the bank estimated in a Jan. 28 report that U.S. LNG is in the money to export this summer, but they said domestic gas would have difficulty sustaining higher prices until the risk of LNG facility curtailments has passed, with the oversupply situation likely to persist through at least 2021.

"The true market of last resort for the global gas glut might actually reside in the Midwest U.S.," White said in an interview, questioning whether Europe will be able to balance the global LNG market. "If the netbacks get sufficiently weak to start pushing back U.S. cargoes, we think U.S. domestic gas prices need to be in such a place to incentivize the Midwest power sector to step up and effectively balance the globe."

Potential upside for the U.S. LNG industry could come from the "phase one" trade agreement signed by the U.S. and China on Jan. 15. China committed to aggressive import targets for U.S. energy products, including U.S. LNG. But significant uncertainty remains over the potential impact the deal, with China's 25% retaliatory tariff on U.S. LNG still in place. No U.S. LNG has been delivered to China since March 2019.

Cheniere Energy Inc. would offer China the best option for satisfying fuel-buying obligations for LNG because most other projects are fully committed or will not be in commercial service in time to count toward the trade pact, energy analyst Katie Bays, co-founder of research and consulting firm Sandhill Strategy, wrote in a Jan. 26 note to clients. Cheniere is the only major U.S. LNG exporter that has a direct long-term off-take agreement with a Chinese counterparty.

A period of LNG oversupply had been anticipated for years, but it was delayed as projects such as the Freeport and Cameron LNG projects faced significant setbacks before coming online last year. Loose market conditions spurred speculation in 2019 about potential curtailments of U.S. LNG production. That never materialized. But a key difference now is the gas storage inventories in Europe and Asia that remain high deep into the winter heating season.

"The market was tough, a lot of people lost money, and people really struggled to place cargoes," Feer said. "But at the end of the day, most of them did, and there weren't any cancellations. This year will be tough in a different way, because storage looks like it's going to be so full. It's going to be harder, sooner, to find a place for what you have."

S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.