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.
When we wrote about U.S. LNG exports in mid-May — see Break It To Me Gently Part 1 and Part 2 — cargo cancellations were only starting to take a toll on Lower-48 gas demand. It was clear that spiraling gas demand due to COVID lockdowns was rapidly exacerbating oversupply conditions in Europe and Asia — the primary destination markets for U.S. LNG. What also became clear pretty quickly is that U.S. LNG would bear the brunt of that supply glut.
Despite over 90% of U.S. liquefaction capacity being under long-term contracts, a number of factors contributed to the extensive cancellations of U.S. cargoes, as we discussed in those springtime blogs. For one, price spreads for delivering U.S. LNG to Europe and Asia, which had been well above $1/MMBtu at the beginning of this year, collapsed and even flipped to negative. As Figure 1 shows, Europe’s UK NBP and Dutch TTF price benchmarks — and briefly also Asia’s JKM index — back in May began trading below the U.S. benchmark Henry Hub, the first time that had happened since the U.S. entered the global LNG market in early 2016. The tighter price spreads, even when positive, didn’t allow offtakers to recoup their variable shipping costs, much less the fixed costs associated with their commercial contracts. That, along with the availability of lower-cost, oil-indexed cargoes in the spot market, put U.S. cargoes squarely out of the money.
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