- More than 40 loadings said nixed in latest tally.
- Improving economics could spur fall rebound.
- The total suggests weak demand will persist through late summer, even with signs of improving economics.
- LNG prices in the US’s two major export markets, Asia and Europe, remain tepid.
The U.S. LNG industry expects to see buyers cancel as many as 45 LNG cargoes for August loading as natural gas demand in the Asian market and bloated European LNG inventories sap enthusiasm for U.S. LNG, writes Julianne Geiger for Oil Price.
That’s similar to the number of U.S. LNG cargoes that were canceled for July loading as well. For June loading, the cancellations were fewer but still substantial—anywhere from 20 to 30.
Narrow profit margin
Part of the problem is the narrow profit margin for U.S. LNG, with Henry Hub prices sitting too close to European gas prices.
Just 10 cents per million British thermal units separate the two. At that price, it’s impossible to turn a profit when factoring in shipping costs. It’s less expensive to pay the cancellation fee.
The cancellations in July and August will mean that U.S. LNG exports will fall by one-third compared to how much the U.S. was shipping back in January.
So far, the cargo cancellations have hit Cheniere’s production the hardest, according to S&P Global Platts.
Cargo cancellations
The canceled cargoes go to support the notion that the U.S. has become the industry’s swing producer, flailing when times are tough and booming when times are good.
The cargo cancellations will soon—if they haven’t already—spill over into chartered vessel demand, pipeline transport volumes, and eventually shale gas drillers in the United States, as demand for LNG at U.S. export terminals remains subdued.
IHS Markit analyst Matthew Shruhan forecast in May that more cancellations would follow.
Sustained low prices for LNG have already caused companies to cut capex and to delay LNG projects going forward, which will, in the long run, help to deplete the inventory overhang. Morgan Stanley sees this overhang dissipating sometime in 2022.
Cargo economics
The GCM-HH spread has been negative since the end of March and has reached differentials as wide as minus 70 cents/MMBtu, implying very negative export economics.
But recently, this spread has fallen to as low as just 1 cent/MMBtu June 18, signaling there could be some recovery for US exports on the horizon.
Prior to the deadline for offtakers to notify US liquefaction terminals about August cancellations, it was thought that the total number could be lower than for July loading volumes, given improved netbacks compared with this time in May.
Sources said it is likely that, given how many portfolio parties have shipping costs sunk into their portfolio, that any volume produced this summer out of the US will be bound for Asia, although depending on slot availability, some might choose to float volume down the Dutch TTF curve into Europe.
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Source: Oil Price
