Value destruction [NGW Magazine]
Asian spot LNG prices fell to a record low in February as demand in China dropped when the coronavirus first emerged. There was then a slight recovery after the low prices generated some buying interest, especially from India. But by mid-April, India stopped buying too and declared force majeure on several recent purchases as it headed into the second week of a six-week lockdown. This saw spot prices fall below $2.30/mn Btu in the main Asia-Pacific market, leaving US LNG exports out of the money for deliveries to Asia.
Since mid-March there has also been a coronavirus-related drop in demand from Europe, where lockdowns have been widespread, leaving no outlet for surplus Asian or US cargoes. Nevertheless, at the end of March, consultancy Wood Mackenzie still expected the LNG market to grow this year, albeit by less: “We expect global LNG demand to grow by 6% year-on-year to 371mn metric tons (mt) in 2020; the numbers will need constant revision as economies around the world feel the force of the growing pandemic,” it said. Events in the last couple of weeks are likely to have triggered another downward revision.
Term, as well as spot supply, is at risk, and oil-linked deals are now also suffering from the collapse in oil prices. The latest fall in Dated Brent (June) below $30/b has seen oil-linked term LNG prices tumble to around $4.20/mn Btu, with little hope of much recovery for the rest of this year (indeed many expect crude prices to go lower) and probably well into next as crude stocks balloon. Buyers in South Korea and Japan are talking to term suppliers about postponing term deliveries as far back as October.
Unusual end to mild winter
Sentiment was already weak as winter ended, with mild weather in the US, Europe and Asia leaving stocks at record highs, and more new LNG supply coming onstream in Australia and the US. The impact of the virus on gas consumption was first felt in China, as a tight lockdown was imposed from late January and into February, leading LNG imports to fall 7% to 4mn t in February.
However, LNG imports were up in February in Japan, South Korea, and Taiwan, which imported 13mn mt between them, 11% more than in February 2019 as buyers snapped up cheap cargoes – in the absence of Chinese demand – and switched from coal to gas burning in power generation. This effect is likely to grow over time, given a continuation of low oil and oil-linked LNG prices. Other markets in Asia also grew to 4.7mn mt in February, a 39% increase on the previous year, with Bangladesh and India accounting for much of that.
India was the brightest spot for LNG demand early in the year, with first-quarter imports up by an average of 29mn m3/d or about 30% over 2019. But by late March, deliveries to Indian regasification terminals had fallen back close to last year’s levels. Since then, force majeure and lockdowns have put up to 50mn m3/d of imports at risk according to SP Global Platts, and imports in Q2 are widely expected to fall below last year’s levels of 93mn m3/d.
China recovery
Looking ahead, Chinese LNG imports had already returned to normal (2019) levels by late March, indicating a relatively rapid recovery. This means demand is only likely to be 6-14bn m³ less than previously forecast in 2020, according to WoodMac – translating to a 4% to 6% growth in gas demand this year. It expects Chinese LNG imports to reach 65mn mt, up 6.6% on 2019, after falling 9% in January/February. Lower gas pricing to non-residential users, designed to provide support to coronavirus-affected businesses, is helping lift demand. Smaller utilities and other players with storage capacity are also buying, keen to take advantage of low spot prices.
Sinopec, which has room available in its storage tanks for spot cargoes, has been buying cargoes for April and May delivery as well. However, Cnooc, the country’s biggest LNG importer, has high stock levels to clear, and has yet to return to the market. Cnooc and PetroChina invoked force majeure on prompt LNG deliveries to Chinese ports in February and early March and may still have concerns about demand in China longer term (see feature).
There is certainly a risk that if China’s exports fall owing to a collapse in global trade, there may also be a drop in energy demand that translates into lower LNG imports. Global growth concerns mean that Japan and South Korea might also import less LNG this year than last, despite fuel switching away from coal.
European, Asian weakness leaves US LNG exports out of the money
LNG imports to Europe had also been growing in February despite relatively high levels of storage, with low prices supporting coal to gas switching among power generators. European LNG imports were 9mn mt, slightly higher than January and a whopping 46% up on February 2019. But from March onwards there has been a sharp drop, and several months of lower than normal demand are anticipated. The length of lockdowns and other restrictions is important, with some countries, notably Germany, already relaxing measures.
The slump in demand in Asia and now Europe has caused prices to fall below the level required to make imports from the US viable, which should help supply and demand rebalance more quickly. This was highlighted by the purchase by Cheniere Energy (which normally exports from the US) of four cargoes for delivery in Europe in the Asian market in early April. About 0.5bn f3/d of US Gulf Coast LNG production is thought to be at risk through Q2-Q3, but this could well rise if demand drops further, according to WoodMac.
As well as the export reductions in the US, LNG output elsewhere has also fallen. In February, global LNG supply was down 8% on January’s level, at 31.8mn mt – although this was still 14% up on February 2019. Most of the fall came from Australia and Qatar, which saw output drop by 0.9mn mt each compared to January. In Australia, North West Shelf accounted for half of the decline. US projects reduced exports by 0.7mn mt in February, with cuts at Sabine Pass, Freeport, and Elba Island. Other suppliers are also cutting, including Egypt’s Idku plant, which has ceased exporting altogether thanks to the low prices.
Seed of recovery?
In the US, current low oil and gas prices are encouraging coal-to-gas switching, which is helping support demand, while there has been little virus-related impact so far. However, there are signs that supply may tighten over coming months – which could be the seed of a price recovery more widely.
Low oil prices are causing dramatic spending reductions among shale drillers, which is also reducing the amount of associated gas produced. “At a lower $35/bl oil price, we could expect about 2bn ft³/d of US gas production to be impacted by middle of next year,” said WoodMac. This could reduce availability for export and/or push up US prices, assuming there is no major virus-related US demand destruction.
Without a price recovery elsewhere, this would cut US exports further, helping to support global prices, especially in 2021. Until then, however, eyes remain fixed on the extent of virus-related demand destruction.