Break It to Me Gently, Part 2 - The Impacts of U.S. LNG Cargo Cancellations

Cancellations of U.S. LNG cargoes are starting to take a toll on Lower-48 natural gas demand. Feedgas flows to U.S. terminals last week fell to as low as 5.76 Bcf/d, down from the daily peaks above 9 Bcf/d seen as recently as April and the lowest since October 2019. While some of the slowdown may be attributable to domestic outages or maintenance on feeder pipes — or short-lived marine channel weather conditions — the bulk of it is a precursor to the first big round of cancellations by offtakers for June delivery. This, as COVID-related demand destruction and the resulting supply glut in the past month have collapsed what already were weak economics for exporting U.S. LNG to Europe and Asia, wiping out offtakers’ margins for delivery into those markets. Nevertheless, many cargoes will continue to move. What drives offtakers’ decision of whether to lift or cancel cargoes? Today, we wrap up a short series looking at the market and logistical dynamics forcing cancellations, as well as some of the mitigating factors that could prop up cargo liftings more than you’d expect in the current environment.

U.S. LNG exports in recent years have become an integral part of balancing the domestic gas market. Since the first large-scale liquefaction train — Cheniere Energy’s Sabine Pass Train 1 — was completed in February 2016, U.S. LNG developers have added 14 more such trains across five terminals, plus six modular “mini” trains at Elba Island in Georgia. Domestic demand for feedgas supplies at the LNG export terminals climbed steadily each year, from an average 400 MMcf/d in early 2016 (blue line in Figure 1) to 1.5 Bcf/d in 2017 (orange line), 2.9 Bcf/d in 2018 (gray line) and 5.1 Bcf/d in 2019 (yellow line), as new trains were completed and offtaker contracts kicked in. Moreover, as we discussed in our two-part Higher and Higher blog series, once incremental demand came online with each addition of liquefaction capacity, it stayed online like clockwork, with the exception of maintenance or weather-related disruptions. Utilization of the trains grew even through 2019, when a growing global supply glut pressured destination prices lower. By December 2019, feedgas demand was up to an average 8 Bcf/d. That climbed to an average 8.6 Bcf/d in the first quarter of 2020 (purple line), or about 8% of total U.S. gas demand during those winter months.

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