European LNG traders braced for bearish Q2, record Q1 lows spill over

European LNG traders have come into the second quarter with a bearish outlook as the global demand profile weights heavy on sentient, pressuring Atlantic producers to limited volume as a result.

Current market sentiment is taking its cue from the record lows hit in the Atlantic market during Q1.

The S&P Global Platts DES Northwest Europe assessment fell to $1.824/MMBtu Thursday, the lowest ever recorded since Platts began assessing this market nearly 10 years ago.

DES NWE lost roughly a quarter of its value through March and almost half its value through Q1.

Other Platts LNG benchmarks hit record lows, with the JKM plumbing $2.35/MMBtu and the Gulf Coast Marker falling to $1.30/MMBtu on March 31.

From the collapse in global LNG prices, arbitrage opportunities have all but dissipated which was led by the downturn in the JKM, with European prices in the doldrums for longer on bearish regional fundamentals.

The coronavirus pandemic has meant many major markets being subject to wide scale government imposed shut-downs, with key consumers in Asia unable to take volumes from producers in the Atlantic and Qatar.

A notable bearish factor for the global LNG market was the announcement in late March of a 21-day lockdown in India, with key buyers (such as Gujarat State Petroleum and GAIL) declaring force majeure to their suppliers for March-April delivery cargoes to Dahej, and other terminals. This led to panic not only in the Asian market but in the Atlantic as volumes, most notably from Qatar, would be in need of a home.

The absence of China as a buying force also led to further concern of where these volumes would need to go.

As a result of this, the optionality for cross-basin optimization was minimized. The premium of the first half of June JKM to first half of May DES NWE was $0.759/MMBtu at the start of March, falling to $0.491/MMBtu by the end of the month.

The news out of India spooked European gas traders, causing a spillover effect into the already over supplied TTF market, which in turn sent European LNG prices to uncharted lows.

Along the curve toward summer, a backwardated JKM curve provides little in the way of bullish sentiment on the latter parts of Q2. According to Platts assessment Thursday, all contracts until the end of summer are pricing under $3/MMBtu, having shown all contracts for this period over $3/MMBtu a month earlier.

LNG prices have also come under strong downward pressure from the plunge in the Brent crude market driven by the Saudi-Russian price war as well as shrinking demand caused by the coronavirus pandemic. Long-term, Brent-based contract deals have been hit by this sudden downturn. This in turn could have a more sustained impact on the final investment decisions on new projects, as it is common for long-term volume commitments to be priced against Brent.

The collapse in crude prices through March had little direct effect on spot LNG prices as there is little correlation between the two, but the effects could be felt in the European gas market, which weighed on the European spot LNG market and in turn, the JKM.

US LNG producers facing cargo cancellations, shut-ins

With no sign of any respite, sources continue to question when off-takers will start to cancel US LNG cargoes, with shut-ins growing more likely by the day.

"The possibility of cancellations is a lot stronger now, and the next cycle is when we could see a lot of them happening," the LNG trader said.

"Volumes of US LNG are already locked in towards Europe through May, and we remain bearish TTF Q3 in particular when we need lower prices to significantly drive down US LNG exports," Platts Analytics Gas Manager James Huckstepp said.

Source see US shut-ins as a potential support for pricing, however, there seems little else for that might provide support.

A Europe-based LNG source said there can be some encouragement taken from Turkey, having seen a slew of tenders recently, but this is not seen as enough to give much support.

"There are limited pockets of hope [for Q2]. Will they suffice? Probably not," the source said.

European gas outlook much the same

"The sentiment for Q2 is still bearish on the lockdown, low demand, temperatures getting warmer -- yet not warm enough to require air conditioning -- industry shut downs, and low oil prices offsetting some LNG demand. It doesn't look promising!" a broker said.

The key Dutch TTF front-month contract remains under significant pressure, extending its fall to another all-time low since S&P Global Platts started assessing the contract in 2004 of Eur6.825/MWh on Thursday, S&P Global Platts and ICE data showed. The TTF front-month fell 50% year on year to average Eur7.875/MWh in March.