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LNG outlook 'could not be more unpredictable' – Wood Mackenzie

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LNG outlook 'could not be more unpredictable' – Wood Mackenzie

U.S. LNG production could fall by 0.5 Bcf/d through the second and third quarters as the coronavirus pandemic pummels demand and worsens a global oversupply of gas, according to a short-term gas and LNG outlook Wood Mackenzie released April 1.

The firm, which provides research and consulting services in such areas as energy, chemicals and metals, said this number could prove too conservative depending on how much LNG demand suffers. Wood Mackenzie expects global demand in 2020 to grow 6% year over year to 371 million tonnes, although it warned that "the numbers will need constant revision as economies around the world feel the force of the growing pandemic."

"While the collapse of LNG prices towards U.S. production break-evens was foreseeable, the narrative for the rest of 2020 could not be more unpredictable," Wood Mackenzie research director Robert Sims said in a statement.

Feed gas deliveries to the six major U.S. LNG terminals remain strong for now, amounting to about 9.1 Bcf/d on March 31, according to pipeline flow data from S&P Global Market Intelligence. But market observers were watching for signs of curtailments at U.S. LNG terminals even before the pandemic began closing down economic activity around the world. U.S. LNG companies themselves have significant financial protection against gas price volatility and potential cargo cancellations. But the impacts of curtailed exports could be significant for the domestic oil and gas market.

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The global LNG market was already oversupplied because of rising supplies, weak demand for natural gas in Northeast Asia and a saturated gas market in Europe even before the coronavirus dealt its blow to economic activity.

"Prospects of any quick recovery in the latter two [market categories] have been dealt a blow by the impending economic downturn many are predicting this year, leaving the only likely balancing item left — a turn down of U.S. Gulf coast production," Sims said.

The Platts Japan Korea Marker, the benchmark price for spot-traded LNG in Northeast Asia, hit a record low at $2.35/MMBtu on March 31. The same day, U.S. benchmark Henry Hub gas was at $1.65/MMBtu.

Europe received record-high LNG deliveries in March, but demand is collapsing at double digit-rates, IHS Markit said in a recent report. Wood Mackenzie said low gas prices still support gas-fired generation in the region, but future coronavirus containment measures and threats of an economic downturn pose risks to global supply chains.

In Asia, sustained low oil prices will make oil-indexed LNG contracts cheaper in major import countries, including Japan and South Korea. This could support coal-to-gas switching in the power sector but hurt U.S. producers, which have supplies linked to Henry Hub prices, Wood Mackenzie said.

In China, where coronavirus containment measures were put in place through January and February, the impact to gas consumption was severe, Wood Mackenzie said. The Chinese economy is now recovering slowly, but experts said the country's gas demand is unlikely to offer significant relief to global gas markets. Wood Mackenzie estimated full-year gas demand in China of between 6 billion cubic meters and 14 Bcm, which the firm said translates to a 4% to 6% growth in demand in 2020. Wood Mackenzie expected China's LNG demand to reach 65 million tonnes this year, a 6.6% growth compared to 2019.

U.S. LNG exports could also be hit by a decline in the production of gas associated with shale oil drilling, which could result in greater Henry Hub prices. Significant uncertainty remains about how those dynamics will play out. But Wood Mackenzie expected U.S. LNG to feel that impact through 2021 because of delays in upstream reductions.

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