The LNG market “implodes”

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While everyone is naturally watching the collapse of the crude oil market, the global natural gas market is also crating.

According to Reuters, at least 20 shipments of US liquefied natural gas (LNG) have been canceled by buyers in Asia and Europe. The global pandemic and the ongoing economic crisis have reduced demand for gas worldwide. Cheniere Energy, a major exporter of LNG in the United States, has seen about 10 shipments canceled by buyers on the other side of the world, said Reuters.

The price of LNG in Asia was already falling before the pandemic, due to a substantial increase in supply last year. LNG prices in Asia for June delivery recently traded at $ 2 / MMBtu, just slightly higher than Henry Hub prices in the United States.

As recently as October, LNG prices in Asia were trading at just under $ 7 / MMBtu.

The problem for US gas exporters is that after factoring in the costs of liquefaction and transportation, the equilibrium prices of gas for delivery to Asia are around $ 5.56 / MMBtu, according to Reuters. But prices are trading at less than half of these levels.

Gas exports tend to be carried out under rigid contracts, but cargoes are now facing cancellation.

“The financial perspective [LNG] ? once one of the hottest energy products in the world – seems to implode before our eyes, “wrote Clark Williams-Derry in a new report for the Institute for Energy Economics and Financial Analysis (IEEFA). He noted that LNG prices in the fall of 2018 were around $ 12 / MMBtu.

The oil majors have made big bets on LNG in recent years. Royal Dutch Shell spent more than $ 50 billion to buy BG Group in 2015. This decision was made at that time, taking into account the growing demand for natural gas. “We will now be able to create a simpler, lighter and more competitive business, focusing on our core expertise in deep waters and LNG,” said Shell CEO Ben van Beurden after the close. of the acquisition of BG Group more than four years ago.

The deal transformed Shell into one of the largest LNG traders on the planet. Several other oil majors – Total SA, ExxonMobil and Chevron, for example – have also made massive bets on LNG.

It can be argued that LNG is now as affected as crude oil by the pandemic and the global downturn. A series of delays or cancellations of major investments have taken place in the past month. ExxonMobil, for example, delayed a final investment decision in a large LNG export project in Mozambique in early April.

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However, the industry faced economic problems even before the current crisis. ” [C]Businesses have tackled delays on the new coronavirus, while ignoring the fact that LNG prices are already deflating long before the worst impacts of the pandemic are felt, “Clark Williams-Derry wrote in the report. IEFA. He wrote that what was striking was that companies of different sizes and corporate structures were reversing decisions – speculative startups, but also state-owned giants and publicly traded super-large companies.

Delayed and canceled cargoes could go back to the upstream sector. The US natural gas industry was also facing problems before 2020 due to oversupply. Exports may not provide the surge in demand it once had for gas drillers. Henry Hub prices are frozen at $ 1.80 / MMBtu.

Ironically, however, gas drillers’ share prices have rebounded in recent weeks. Pittsburgh-based EQT has seen its share price double since March, for example. There are several reasons for this. The Federal Reserve has channeled trillions of dollars into the financial sector, which has boosted financial assets of all types. Investors also seem to be trying to “buy the drop.”

But industry analysts also predict that a huge gas production deficit in the Permian will push prices up next year. Goldman Sachs says gas will increase to $ 3.25 / MMBtu in 2021.

At the moment, however, the LNG economy is rather bleak. “The LNG industry has entered today’s crisis on precarious foundations. And now that the economic downturn is in full swing, all previous projections of LNG supply and demand have become moot, and all crystal balls remain cloudy, “said Williams-Derry. “In this context, delay is a smart decision.”

By Nick Cunningham of Oilprice.com

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