Talk about whiplash! Not that long ago, the global LNG market was reeling from the effects of the pandemic: stunted demand, severe oversupply, brimming storage, and record low prices, all of which led to a squeeze on offtaker margins and mass cancellations of U.S. cargoes. Within a matter of months, however, the market has done a 180. Global supply has tightened significantly as cargoes can’t get delivered fast enough, and international LNG prices are near two-year highs. U.S. LNG exports and domestic feedgas demand are at record highs in December, for the second straight month. That’s not to say U.S. LNG producers and the domestic gas market are out of the woods. Cancellations are rearing their heads again — not because the demand isn’t there, but because of logistical constraints and a severe vessel shortage, which are injecting more uncertainty into the market. Today, we provide an update on domestic LNG exports and the immediate factors driving them.
The LNG market has come a long way since the summer. Earlier this year, the pandemic wreaked havoc on the international LNG trade. International prices had already weakened considerably since mid- to late-2019 as oversupply conditions were gradually worsening with the export capacity additions in the U.S. and Australia. The pandemic combined with high storage levels in Europe quickly exacerbated those conditions several fold. Lockdowns decimated demand in destination markets and closed some ports. The market became severely oversupplied and storage constraints loomed. Cargoes in mid-voyage were left looking for a home. The result was a convergence in global prices with Henry Hub near $2/MMBtu. Price spreads collapsed to almost nothing and even reversed, with destination prices trading below Henry at times (dashed gray oval in Figure 1). Something had to give, and it was U.S. LNG exports (see LNG Interruption) that were marginalized. Given the farther voyage distances from the U.S. and narrow spreads, transportation economics from the U.S. became untenable. U.S. offtakers were left to weigh economics against long-term obligations and make the difficult decision of foregoing contracted cargoes or taking their chances in the spot market. A spate of U.S. cargo cancellations followed from May through September. We detailed the economics of LNG exports in Sultans of Swing.
Join Backstage Pass to Read Full Article
