Natural Gas Glut Has US Exporters Facing Worst-Case Scenario
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A global glut of natural gas has gotten so massive that U.S. exporters could soon face their worst-case scenario: Halting shipments to get supply and demand back in balance.
Prices for the heating and power-plant fuel may collapse in Europe and Asia next year to levels that would force U.S. liquefied natural gas suppliers to curb output, Citigroup Inc. said in a note to clients last week. Morgan Stanley sees as much as 2.7 billion cubic feet a day of American exports curtailed around the second or third quarter, assuming normal weather. That鈥檚 about half the volume now being sent abroad.
China鈥檚 demand for U.S. LNG has plunged amid the trade war, while Europe鈥檚 gas storage is almost full and tankers carrying the fuel are taking unusually long journeys in search of better prices. That鈥檚 created a 鈥渢oxic witch鈥檚 brew鈥 that鈥檚 making it harder to find a home for American exports, according to Madeline Jowdy, senior director of global gas and LNG for S&P Global Platts in New York.
鈥淚t鈥檚 also a harbinger of bigger troubles ahead for U.S. exporters in the second quarter of next year, when global demand is at its weakest point and the U.S. will have even more volumes to place鈥 as new export terminals start up, Jowdy said in an email.
Capping LNG production is an extreme measure, but the idea is gaining traction as new terminals from the U.S. to Australia unleash exports faster than demand can catch up. Gas for near-term delivery in Asia has lost half its value in the past 14 months, with the Dutch benchmark nearly matching that decline. A mild winter would make the glut even worse 鈥 bad news for U.S. suppliers like Cheniere Energy Inc. and Sempra Energy.
LNG Boom
In the past three years, soaring gas output from shale basins has vaulted the U.S. into the ranks of the world鈥檚 largest LNG producers. The nation is widely seen as a so-called swing supplier because its exports can respond quickly to a volatile market.
Curtailments can happen when customers such as trading houses, which resell the fuel to utilities and other end users, refuse to load cargoes because prices are too low to cover shipping costs and still make a profit. The cancellations can force exporters to cap, or 鈥渟hut in,鈥 LNG production as their storage tanks fill up.
While customers of American LNG export terminals have to pay a fee to reserve the fuel under long-term contracts, they can opt out of buying with 30 to 60 days鈥 notice. That鈥檚 in contrast to traditional contracts from suppliers like Qatar and Australia, which require buyers to take or pay for a fixed amount whether they need it or not.
Singapore鈥檚 Pavilion Energy Pte said this month that it canceled the loading of an LNG cargo from the U.S., though Pavilion said the decision was based on logistics and didn鈥檛 directly attribute it to low gas prices. But additional shut-ins of American exports could follow, Michael Webber, managing partner of Webber Research & Advisory LLC, said in an email.
With the exception of the Pavilion cargo, though, buyers of U.S. LNG have continued to load shipments. Traders will likely need to have a view of at least two months out to cancel, Peter Abdo, chief commercial officer for LNG and origination at Uniper Global Commodities SE, said at the Bloomberg Commodity Investor Forum in London this month. Uniper doesn鈥檛 plan to refuse cargoes, he said.
The top executive at Cheniere, the largest U.S. gas exporter, has dismissed concerns about shut-ins.
The question 鈥渘ever ceases to amaze me,鈥 Chief Executive Officer Jack Fusco said during the company鈥檚 third-quarter earnings call last month. Cheniere鈥檚 cargoes 鈥渁re extremely competitive,鈥 Fusco said. A representative for Cheniere declined to comment on possible LNG production curtailments, while Sempra declined to discuss commercial arrangements.
So far, the premium for winter gas over near-term prices has spurred record American shipments. But European gas prices could potentially slip below $3 per million British thermal units in the spring and summer, potentially forcing U.S. exports to shut in, Citigroup said in its report. Gas at the Dutch Title Transfer Facility is now trading near $5.
Benchmark gas prices in the U.S., Europe and Asia are expected to remain under pressure next year from strong supply growth, Goldman Sachs Group Inc. analysts said in a research note Nov. 25.
鈥淭here鈥檚 too much gas in Asia, there鈥檚 too much gas in Europe and that means the U.S. may need to be the swing supplier,鈥 Devin McDermott, an equities analyst and commodities strategist for Morgan Stanley in New York, said in a telephone interview.
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