The summer outlook for U.S. LNG exports is becoming bleaker despite a modest improvement in the economics of shipping cargoes.

More than 40 U.S. LNG cargos for August loading were canceled by buyers, Poten & Partners said in a June 24 outlook. The shipbroker had counted similar levels of cancellations for July, which followed dozens of cargo cancellations for June.

All of the major U.S. terminals, concentrated on the Gulf of Mexico, saw significant cancellations. The August shut-ins accounted for about half or more of U.S. export capacity.

"That's a very significant impact on U.S. exports," said Jason Feer, head of business intelligence at Poten & Partners. "It's important to note though that that's how the system was designed — to allow for these cancellations. We have seen no indication so far of anyone not performing on their contracts. So basically that U.S. safety valve is really functioning pretty much as intended."

Most U.S. LNG capacity is tied to long-term contracts that provide exporters with significant financial protection against cargo cancellations. The supply deals allow buyers to cancel cargoes, but they also guarantee fixed liquefaction fees that make up the bulk of U.S. LNG companies' cash flow.

This summer there is an incentive for offtakers to cancel. Global gas demand is struggling to recover from coronavirus-driven lockdowns in a market that was already oversupplied at the start of the year. And there is still significant uncertainty about how the timing and depth of the cancellations will line up with adjustments to gas supply in the U.S., especially a decline in upstream gas production.

Feedgas deliveries to the six major U.S. LNG terminals operating in the U.S. lately have hovered around 4 Bcf/d, a sharp decline from levels that exceeded 9 Bcf/d in late March, according to pipeline flow data from S&P Global Market Intelligence.

U.S. exporters have disclosed few specifics about the depth of the upcoming shut-ins. But about two dozen canceled cargoes for August are tied to Cheniere Energy Inc.'s terminals in Louisiana and Texas, S&P Global Platts reported, citing market sources. The U.S. Energy Information Administration recently estimated that U.S. LNG exports in April and May totaled 7.0 Bcf/d and 5.8 Bcf/d, respectively. The agency projected that gross LNG exports would bottom at 3.2 Bcf/d in July.

Poten & Partners expected further U.S. cargo cancellations for September when the deadline to notify suppliers arrives in July. The shipbroker projected the global gas market to become more balanced in the remaining months of the year. But it cautioned that demand in some key markets, such as Europe, Japan, South Korea and China, will remain soft unless there is a cold winter.

Since early May, U.S. Henry Hub prices trading above benchmark European prices have made it unprofitable to ship spot U.S. cargoes to Europe, a key market. In April, about 42% of U.S. LNG cargoes departed for Europe, where storage levels are filling up, according to an S&P Global Market Intelligence analysis of figures from the U.S. Department of Energy, released June 16.

A decline in LNG flowing from the U.S. to Europe has helped take the pressure off prices in Europe. But flexible gas supplies from Norway are also preventing prices from rising high enough to promote U.S. LNG exports, Poten & Partners said.

South Korea and China were among the top importers of U.S. LNG in April at about 24.3 Bcf and 21.1 Bcf during the month, respectively, according to the DOE figures.

The shipments to China were a rare bright spot for exporters that followed the country's "phase 1" trade deal with the U.S., before deteriorating market conditions and a flare-up of tensions between the U.S. and China dimmed the prospects of an increase in U.S. LNG shipments to that market.

In countries that have emerged from widespread lockdowns, such as China, LNG demand that slumped with a decline in economic activity remains depressed, in part because these countries' manufacturing economies depend on export markets that are still quiet, including those in Europe and the U.S. This could apply to South Korea, which was more successful at containing the spread of the coronavirus than many other countries.

"We have seen these demand bounces from a couple countries ending lockdowns, but it sounds like some of those are fairly short-lived," Feer said "They sort of satisfied pent-up demand, and then export markets remained sluggish."

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