Record-high LNG deliveries to Europe in March will squeeze prices that are already at historic lows as the coronavirus pandemic pummels demand, IHS Markit said March 27.

Total deliveries for the month will likely reach 11 million tonnes, a volume 14% greater than the previous record set in December 2019, right as natural gas demand plummets at double-digit rates with lockdowns in several European countries, the research and analysis firm said. This stands to further strain a global LNG market that was already in turmoil because of weaker-than-expected winter demand and a global glut as new supplies continue to come online, primarily in the U.S.

"The record in LNG deliveries to Europe is a domino effect from the demand impacts of the coronavirus pandemic," said Michael Stoppard, chief strategist of global gas at IHS Markit. "Asian buyers are reselling volumes purchased from the U.S. and portfolio sellers are offloading their excess cargoes as well. This all comes as European gas markets are already in extreme distress."

Europe has been a key market for exporters of U.S. LNG over the past year, absorbing a flood of new natural gas supply. The surplus of gas in Europe is likely to fuel renewed questions about the prospects of LNG production curtailments in the U.S.

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Most U.S. LNG supply is linked to long-term take-or-pay contracts that guarantee the producers a fixed fee that makes up the majority of their cash flow even if customers cancel cargoes. This means U.S. producers have significant financial protection from curtailments. But cutting off a critical outlet for U.S. production could prove disruptive to oversupplied domestic markets, depressing Henry Hub gas prices and pressuring upstream companies to shut in gas production.

Significant uncertainty remains about the extent of the global demand destruction for gas that the coronavirus will cause as well as the severity of the economic fallout.

But even before the coronavirus, Europe had significantly less wiggle room in 2020 than in 2019 to act as a market of last resort for LNG. European imports in March will nonetheless be roughly equivalent to or greater than the volume of the combined monthly imports of South Korea and Japan, IHS Markit said.

Europe's natural gas storage capacity on the first day of March was about 60% full, compared to about 38% at that time of the year during the past five years, according to a March 24 report by the U.S. Energy Information Administration. By March 25, underground storage facilities in the U.K. and European Union remained about 55% full, IHS Markit said.

"This unprecedented surge of LNG supply to Europe is certain to cause knock-on effects," said Shankari Srinivasan, vice president of gas and power at IHS Markit. "Storage inventories will build up earlier than normal and that will put additional downward pressure on prices in the third quarter and winter delivery months. It is a chain reaction."

Inventories could fill as soon as July, which could create a wave of LNG cargo cancellations in the fall, oil and gas ship broker Poten & Partners predicted recently.

"Unless there is a really rapid economic turnaround, we think pretty significant supply cuts are going to be needed," said Jason Feer, head of business intelligence at Poten & Partners, during a March 25 webinar. "That will, at least in significant part, be shouldered by the U.S. LNG producers, although lifters will of course pay for their liquefaction fees."