TELF AG examines Declining of LNG Prices and Concerns over US Export Cancellations – May 29, 2023

A steady decline

Traders Brace for Potential US LNG Shipment Cancellations amid Plummeting Global Prices

As liquefied natural gas (LNG) prices witness a steady decline, concerns are mounting among traders about the possibility of cancellations for US LNG shipments in the near future.

The Asian spot prices for LNG have witnessed a staggering drop of over 85% compared to last year’s record highs, reaching lows not seen since May 2021. Similarly, European gas prices have slumped by 70% over the past year. These declining prices and lackluster demand became topics of discussion among traders at a recent energy fair in Essen, Germany, raising concerns of a potential supply-side response.

The economic viability of exporting LNG from the US is under threat if prices continue to fall. Gyorgy Vargha, CEO of Swiss trader MET International AG, voiced his apprehensions, stating, “The market is not far from seeing US LNG cargo cancellations. We are approaching the bottom.”

By September, when European storage sites are anticipated to reach full capacity, companies holding contracts for US LNG shipments may opt to cancel scheduled deliveries to avoid substantial losses. This scenario, last witnessed in 2020, resulted in numerous cargo refusals and hefty penalty payments in the millions of dollars.

The potential impact of such cancellations could be significant, leading to a surplus of gas within the US market and causing domestic prices to hit new lows. Furthermore, it could disrupt the fragile market balance established after countries bolstered their supply security measures for Europe.

However, despite these concerns, the current price differentials to Europe and Asia still offer sufficient margins to justify loading US LNG cargoes. BloombergNEF data indicates that US LNG remains profitable until November based on global differentials. Moreover, any tightening of global supply, such as maintenance or the Atlantic hurricane season, could help maintain wide price differentials and support the continuation of US loadings.

According to Kazunori Kasai, head of the Singapore-based trading arm of Jera Co., one of the largest buyers of LNG globally, cancellations are likely to occur only if LNG spot prices reach single-digit lows. Kasai noted that current prices stand around $9 per million British thermal units (MMBtu), having peaked at over $71 in August.

Typically, purchasers must provide two months’ advance notice to LNG producers, such as Cheniere Energy Inc., for any cargo cancellations, with the deadline falling on the 20th of the preceding month. Hence, decisions regarding September loadings will be made in July.

Energy Aspects Ltd., a consulting firm, highlighted that European gas prices are more likely to approach levels that could prompt the curtailment of US LNG by late summer, although it is not their base case scenario.