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LNG glut will grow worse with coronavirus, analysts predict

The drop in Chinese energy demand from a spreading coronavirus outbreak could increase the chances that some U.S. LNG exporters will have to curtail shipments that were already at risk due to a global glut of natural gas, LNG industry analysts warned.

Several analysts have lowered their forecasts of China's LNG demand in 2020, even as they differ in their estimates of the severity of the impact of the coronavirus. LNG prices in Europe and Asia had already plummeted before the outbreak as a result of rising gas supplies, especially in the U.S., coupled with a relatively mild winter that has contributed to weaker-than-expected demand.

But the outbreak dealt another blow. China's imports of LNG, crude oil and other commodities slumped with quarantines and travel restrictions. Fitch Ratings warned Feb. 11 that fewer Chinese LNG imports "could put the natural gas markets in Europe and Asia under severe stress" and "significantly delay the supply-demand rebalancing expected in 2020."

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Analysts said prices have almost weakened to the point that off-takers of U.S. LNG might decide to cancel cargoes. A recent decision by China's biggest LNG buyer to declare force majeure because of the outbreak heightened that speculation.

The Platts Japan Korea Marker, the benchmark price for spot-traded LNG in Northeast Asia, tumbled below $3/MMBtu on Feb. 7 and was assessed at about $2.76/MMBtu on Feb. 12, according to S&P Global Platts. Spot prices at that level are below U.S. LNG producers' cash break-even costs, Sanford C. Bernstein & Co. analysts said Feb. 12.

"We see clear evidence of U.S. LNG supply being reduced as a result, which should help bring the market back into balance," Bernstein analysts said.

The force majeure declaration by China National Offshore Oil Corp., or CNOOC, posed little direct threat to U.S. LNG exporters, analysts said. The U.S. exporters have no direct supply agreements with the CNOOC, and no U.S. LNG cargoes have been delivered into China in nearly a year because of the ongoing trade tensions between the two countries. China's 25% retaliatory tariff has remained in place.

But a sharp decline in demand from the world's fastest-growing LNG importer stood to have knock-on effects in an already soft Asian LNG spot market. Fitch did not anticipate prices remaining at such low levels, but it said the prices could force some production shut-ins and delay final investment decisions on the next generation of projects that have a target of coming online by the mid-2020s. A prolonged period of low spot prices could spur contract renegotiations between suppliers and Asian buyers with contracts linked to oil, which could slow down projects in development, Fitch said.

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Rystad Energy analysts on Feb. 12 cast fresh doubt on the potential upside for the U.S. LNG industry from the "phase one" trade agreement signed by the U.S. and China on Jan. 15. Under the deal, China committed to aggressive purchases of U.S. energy products, including LNG.

"Rystad Energy expects a reduction or even a complete removal of tariffs on imports of U.S. LNG," the analysts wrote. "Nevertheless, our calculations show that volumes will most likely remain relatively low, due to both the cost-competitiveness of other global supplies and to the coronavirus epidemic's effect on Chinese LNG demand."

Goldman Sachs analysts on Feb. 5 lowered their expected growth in China's LNG imports for the first quarter by 8.4 million tonnes per annum, reflecting nearly zero year-on-year growth.

Bernstein analysts cut their estimate of China's year-over-year LNG demand growth from 13% to 4%.

Wood Mackenzie estimated that gas demand loss in China reached 2 billion cubic meters, or bcm, by the end of the first week of February. It predicted a full-year demand reduction of 6 bcm to 14 bcm. The consultancy estimated LNG supplies would bear the brunt of the drop-off.

"With too much LNG, and nowhere left to place it, it looks like a supply correction is needed to balance the market," Wood Mackenzie Research Director Robert Sims said in a Feb. 11 report, adding that the supply response could appear in markets such as Egypt and Australia. "However, it is U.S. Gulf producers who have the highest marginal cost of supply and the most flexibility."

S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.