Feedgas deliveries to the six major U.S. LNG terminals plummeted during the first week of June to the lowest levels this year as the depth of cargo cancellations exceeded the expectations of market observers.
The shipbroker Poten & Partners counted at least 33 U.S. LNG cargoes canceled for June. The cancellations came in response to an oversupplied market exacerbated by the combined global health and economic crisis of the coronavirus pandemic and its effect on world demand. Some 45 U.S. LNG cargoes have also been canceled for July.
The result has been a sharp decline in natural gas flows to U.S. export facilities to about 3.7 Bcf/d on June 7, down from levels that were higher than 9 Bcf/d in late March, according to pipeline flow data from S&P Global Market Intelligence.
Such cuts are necessary with the current market and high global storage levels, which together require about 2 million tonnes of LNG production a month to come out of the market, said Jason Feer, head of business intelligence at Poten & Partners. The U.S. is expected to bear the brunt of it.
"If you don't get those kinds of cancellations, then storage fills up faster, prices tank sooner, and then you end up with bigger cancellations later," Feer said in an interview. "There is not a secret huge amount of storage capacity where you can keep taking LNG and stuffing it. That was Europe, and Europe is full."
Even before the coronavirus locked down economic activity, high storage levels in Europe had prompted some experts to warn of U.S. LNG shut-ins later in the year. But the coronavirus made the problem worse. In a sign of how severe that oversupply has become, a few tankers have delivered LNG cargoes to the U.S.
"Outright prices are better in the U.S. than they are in Europe," Feer said. "The U.S. is a better market. And then after you look at freight, the U.S. is much better than trying to dump a cargo into Europe."
Some analysts have said European gas prices could fall into negative territory as storage capacity becomes full. But gas prices already make it unprofitable to ship a spot U.S. LNG cargo to a buyer in Europe or Asia, a situation expected to last for the rest of 2020 even with the slow return to normal economic activity in some places, such as China.
Other world LNG producers have cut some production, but not to the extent of U.S. producers. That is because U.S. LNG cargoes are generally the easiest for world buyers to cancel because they are sold in a way that does not require buyers to pay the full cost of the shipment. Most U.S. LNG production is tied to long-term contracts that allow the buyers to cancel cargoes but also guarantee the LNG producers fixed liquefaction fees. These fees make up the bulk of the export companies' cash flow, giving them significant financial protection against cancellations.
But there is also significant uncertainty about the impact on the domestic gas market from the shut-ins. Analysts say that will likely rest on how the timing and depth of the cancellations line up with adjustments to gas supply in the U.S., especially a decline in upstream gas production.
Flows dipped from about 6 Bcf/d at the end of May to below 3.7 Bcf/d on June 1. They briefly rebounded above 5 Bcf/d on June 4 before falling again. The swing was driven by flows to Cheniere Energy Inc.'s Sabine Pass LNG terminal, where a cargo departed on June 3 and another arrived days later.
Feedgas deliveries at such low levels could help drive U.S. gas storage to full capacity in October, Goldman Sachs analysts cautioned in a recent note. The bank on June 3 increased its expected U.S. LNG summer cancellations to nearly 4 Bcf/d from around 2 Bcf/d and lowered its NYMEX natural gas price forecast for July through October by $0.35/MMBtu to $1.75/MMBtu. The bank reasoned that the drop would be needed to produce sufficient coal-to-gas switching to help sop up domestic gas oversupply. But Goldman analysts also said that coal-to-gas switching would not be enough for U.S. gas producers to avoid having to shut-in this summer if deliveries to U.S. LNG facilities remain as low as they are.
IHS Markit said in an outlook that utilization of the six U.S. LNG terminals could fall below 50% at times this summer, but the deliveries will likely oscillate. The research and consulting firm projected a bumpy rebalancing of the global LNG market from the turndown in U.S. exports.
Poten & Partners projected the wave of cancellations to last through October. Then U.S. exports should start to pick up as winter demand for gas begins to drain European storage.
"If it is another warm winter, though, we will do the whole thing again," Feer said.