It’s a perfect storm. Liquefied natural gas prices have plummeted on a combination of demand destruction caused by the COVID-19 pandemic, and fast-growing supply as a wave of new export facilities have added to global capacity.
The extent of the price plunge was brought home to the market last week when trader Vitol sold a cargo of LNG to Gunvor at $2.05/mmbtu for early-June delivery to northern Asia.
That may be the lowest price ever for a spot cargo in the region; in January the price was more than $5/mmbtu. Gas for delivery at the Henry Hub pipeline in the US, the benchmark for most global trade, last traded at around $1.75/mmbtu. Asia prices reflect global price trends, particularly the delivered cost for US cargoes.
For a number of months global gas prices have been in decline as more and more liquefaction capacity has come on line, particularly in the US. In 2017 the United States became a net gas exporter for the first time, and while it’s a long way from challenging Qatar and Australia as the leading shippers of the fuel, American gas looks set to remain a feature of the global market.
Meanwhile, the onset of the pandemic has hit demand. US natural gas inventories have grown by vast increments in recent weeks: in the week ending April 10, the US Energy Information Administration reported a huge 73 Bcf injection into storages.
At the end of March, European gas storages were over 60% full, a record for the time of year due to a combination of a mild winter that dampened consumption, and high deliveries in 2019.
Buyers in Europe and Asia have been delaying deliveries and in many cases trying to cancel cargoes. Spain’s Endesa has cancelled two deliveries from the US in June and July, while buyers in Asia are reportedly in talks to push back cargoes that are scheduled to arrive between now and October.
Purchasers are also exercising options to reduce by as much as 10% the size of cargoes delivered under contract, as import storages reach near maximum capacity.
On the supply side the picture continues to look gloomy, as even more gas deliveries, and export capacity are on the way.
After the US and China signed a trade deal earlier this year, China has lifted its 25% tariff on natural gas, and the US has been quick to take advantage. The first shipment of post-deal LNG arrived in China on April 20, and reports indicate up to six more cargoes may be heading east.
The US federal government has awarded a conditional permit to Pembina Pipeline Corporation’s Jordan Cove LNG terminal in the state of Oregon, though local permission is still pending.
Australia, which last year became the world’s to exporter, is also progressing plans for world-scale import terminals to supply other parts of the country.
Producer Santos has signed a letter of intent to sell a 12.5% stake in its Barossa field to Japan’s JERA, output from which will feed the Darwin LNG terminal project. At the same time, PetroChina and Shell’s Arrow project has taken the final decision to proceed with the Surat Gas Project that will start supplying Australia’s east coast market from 2021.
A number of deals are also under way to develop LNG marketing capacity throughout Asia, which points to a continued healthy supply of gas into the region.
Even as demand is confidently predicted to continue to grow for many years to come, particularly in Asia, the current oversupply is threatening many producers, particularly marginal shale producers in the US.
The low Henry Hub prices have already led to the bankruptcy of one producer – Whiting Petroleum Corporation – and analysts warn that a prolonged period of low prices may drive others into insolvency as well.
With WTI oil prices now down to less than $20/barrel, shale oil and gas producers aren’t covering their costs, and company analysts are confidently predicting a surge in bankruptcies in the coming months. It may take this kind of pain in order to rein in enough supply to rebalance the market.
