The coronavirus pandemic presents a growing threat to U.S. LNG exports and the domestic gas market as countries shut down economic activity in an attempt to stop the spread of the virus, cutting demand for natural gas.
Significant uncertainty remains about the severity and duration of the demand destruction, which has intensified with lockdowns, experts said. It has yet to materialize in feed gas deliveries to the six major U.S. LNG export terminals, which remain strong at about 9.4 Bcf/d over the weekend ending March 22, according to pipeline flow data from S&P Global Market Intelligence. But there are mounting expectations that the economic fallout from the pandemic will ripple through U.S. LNG exports.
"There is no doubt about it," Robert McBride, senior director for strategy and analytics at Enverus, said in an interview. "It is such uncharted territory that we haven't gotten any data that will clearly define how big or how bad it will be. And, ironically, if you look at feed gas flows today, we are almost at all-time highs. But there's just no way with what's happening globally that there will be no impact here."
Even before the outbreak, market observers were questioning whether LNG exporters would have to curtail production because of a global supply glut and weak prices. The coronavirus pandemic just made things worse.
How long lockdowns remain in place and how quickly economies bounce back are major uncertainties.
"There is no precedent for a global pandemic that shuts down lots of economic activity," Jason Feer, head of business intelligence at oil and gas ship broker Poten & Partners, said in an interview. "You are trying to make reasonable assumptions without going crazy, but you also want to try to be realistic about how significant the impact is going to be, and the impact is going to be significant."
Goldman Sachs analysts predicted that oversupply in the European gas market would require a shut-in of U.S. LNG exports this year to help balance the global LNG market. In a March 24 note to clients, the bank forecast U.S. LNG exports to fall from previous assumptions by 0.7 Bcf/d in the second quarter and 1 Bcf/d in the third quarter because of expected cancellations.
U.S. LNG companies themselves have significant financial protection against gas price volatility and potential cargo cancellations. Most U.S. LNG supply is linked to long-term take-or-pay contracts that guarantee the producers a fixed fee that makes up the majority of their cash flow even if customers cancel cargoes, as two of Cheniere Energy Inc.'s customers did with cargoes for April loading.
But throttled back LNG exports could pummel Henry Hub prices and pressure upstream gas companies to curtail production, especially as domestic demand falls because of the coronavirus.
Many of the top export markets for U.S. LNG are hotspots for the virus, according to the U.S. Department of Energy export figures and data on coronavirus cases from Johns Hopkins University as of March 24. Exporters of U.S. LNG leaned heavily on Europe in 2019 to absorb the flood of new natural gas supply, with the top destinations being the U.K., Spain and France, which all have lockdowns in place. In January, about 48% of U.S. LNG exports went to Europe and Central Asia, which includes Turkey.
Spain is home to about a third of Europe's LNG import capacity, and a lockdown there was seen as especially likely to "gum up the global LNG supply chain" if it results in an expected drop in demand for gas and a reduced ability to support planned imports, analysts at ICIS said March 16.
In January, about 24.4 Bcf of U.S. LNG headed to Spain, according to the most recent figures from the DOE, released March 16. The country had 39,676 coronavirus cases as of March 24.
Italy, another major market for U.S. cargoes, has been hit especially hard. Italy had 69,176 cases confirmed as of March 24, the second-most of any country behind China. The death toll in Italy reached 6,820, the most of any country in the world. Residential gas demand in Italy has increased with people staying home, but that is outweighed by sharp declines in the industrial and power generation sectors. Industrial and power demand in Italy have fallen by 15% and 17%, respectively, Goldman Sachs analysts said.
Still, European LNG regasification rates from the beginning of March through March 19 have not shown signs of slowing despite weaker demand with several countries in lockdown, according to a March 20 report from S&P Global Platts. But flows from Norway and Russia also remain strong, and market participants have been adding to already high storage volumes to balance the system.
European storage could be full by July, setting up a wave of LNG cargo cancellations in the fall, Feer said.
"You have these very full inventories, and now layered on top of that you have this real economic shock," Feer said. "Those two things are going to make life very difficult."
Europe's natural gas storage capacity on the first day of March was about 60%, compared to about 38% at that time of the year during the past five years, according to a March 24 report by the U.S. Energy Information Administration.
Some supply-side relief could come from U.S. gas production declines as a result of U.S. oil and gas producers' spending cuts in the wake of the oil price crash.
Goldman Sachs expects a "whiplash" in natural gas markets this summer before supply declines materialize to help to rein in the global oversupply of gas and boost Henry Hub prices at the end of the year.
But it remains unclear how quickly U.S. gas production will decline and relieve pressure on the domestic oversupply balance.
"The decision to not liquefy a cargo may not be as painful for the whole market to absorb if all of a sudden the total supply is going down," McBride said. "You are going to have room to put it in storage."
S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.