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

Global natural gas demand disruptions and high storage levels resulting from the COVID crisis have turned international LNG markets upside down. Price spreads for U.S. LNG exports, which were well above $1/MMBtu two months ago, have disappeared and even flipped to negative, with the UK NBP and Dutch TTF price benchmarks — and briefly also Asia’s JKM index — trading below the U.S. benchmark Henry Hub for the first time since the U.S. began exporting LNG in early 2016. Despite the uneconomic price spreads, U.S. cargo liftings have slowed only modestly so far. That’s likely to change in the coming months as both Cheniere Energy and Sempra have confirmed cancellations or modifications to lifting schedules by some offtakers, and other terminal operators are likely facing the same pressure. However, many U.S. cargoes will still move, regardless of prices. What are the economics of cancelling versus lifting a seemingly out-of-the-money cargo? Today, we begin a short series examining the factors affecting U.S. LNG cargo liftings.

U.S. LNG exports in recent months have gone from providing a consistent and growing source of demand to balance the U.S. natural gas market to now being a drag on demand growth and the gas market balance. Rising storage surpluses and record low prices in Europe and Asia, along with relative strength in the U.S. national benchmark prices at Henry Hub, have turned the economics upside down for U.S. exports and led to widespread cancellations of contracted cargoes. Feedgas deliveries and cargo liftings at Lower-48 terminals both have plummeted to the lowest levels since early 2019, despite domestic liquefaction capacity climbing by more than 4 Bcf/d since then. Moreover, the dynamics that led to the current predicament are likely to persist at least through injection season and potentially even beyond that to a certain extent. Today, we provide an update on how cargo cancellations have affected U.S. gas demand for exports, overall and at individual terminals.

Not long ago, the economics for U.S. LNG exports were practically a no-brainer. Despite the longer voyage times and the resulting higher shipping costs from Gulf Coast and East Coast ports to Europe and Asia — by far the biggest LNG consuming regions — LNG priced at the U.S.’s Henry Hub gas benchmark presented a competitive alternative to other global LNG supply, much of which is indexed to oil prices, which were higher then. But earlier this year, as oil prices collapsed, COVID-19 lockdowns decimated worldwide gas demand, and international gas prices plummeted, the decision to lift U.S. cargoes has become much more nuanced, and the commercial agreements to support the development of new liquefaction capacity are much harder — if not impossible — to come by. Today, we discuss highlights from RBN’s latest Drill Down Report on the impact of recent market events on U.S. export demand, capacity utilization, and new project development.