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Strong margins keep US LNG exports growing

Business is booming this winter for the US LNG-export industry.

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With global gas prices at their highest in over three years, export margins from the US are at their strongest yet.

In December, those margins propelled cargo shipments to the highest monthly volume on record, nearly 85 Bcf.

Thanks to a natural gas shortage in China, bitterly cold temperatures in Japan and a supply shortfall in Australia, benchmark global prices, currently around $11/MMBtu, appear likely to linger through mid-February.



Combined with the looming startup of exports from Dominion Energy's Cove Point facility in Maryland, elevated global gas prices are poised to keep US exports in record-setting territory again this month.

But with swaps markets betting on weaker shoulder-season demand setting in by April, US exporters could be facing prices below $8/MMBtu by early March and ultimately the upper $6s/MMBtu before the summer months.

As US export volumes continue to build in 2018, a return to lower prices later this year will pose new challenges both for exports and for a domestic US gas market that's growing increasingly dependent on the whims of global demand.


DECEMBER EXPORTS, CARGOES TO ASIA HIT RECORD HIGH


On Monday the Platts JKM, the benchmark price for spot LNG delivered to northeast Asia, was assessed unchanged at $11.20/MMBtu.

By late December, that price level boosted the profit margin on US export cargoes delivered to the region to a record-high $4.57/MMBtu, according to Platts Analytics.

The calculation includes gas transport, shipping costs and product losses along the value change, but excludes sunk-cost liquefaction fees currently estimated at between $2.25-$3/MMBtu.

At just over $4/MMBtu, the average profit margin on US cargoes delivered to East Asia last month helped propel US exports to the region to a record high 56 Bcf, representing over 65% of the total monthly shipment volume, Platts Analytics' Eclipse Energy data shows.

While Cheniere Energy's Sabine Pass export terminal achieved substantial completion of its Train 4 liquefaction facility in mid-October, feedgas and exports to and from the facility have continued rising in recent weeks, likely supported by elevated export margins.

In January, flows to Sabine Pass are just shy of nameplate capacity at 3.2 Bcf/d.


SWAPS MARKETS BET ON FALLING GLOBAL PRICES


While US exporters are likely to continue enjoying record margins through January, swaps markets see looming backwardation hitting the market by mid-March.

As the prompt-month cargo market shifts to April, swaps markets see prices falling to around $7.70/MMBtu.

For the third-quarter, the market now sees prices at just $6.85/MMBtu, Platts data shows.

As global gas prices and demand crest in the coming weeks, looming growth in US liquefaction capacity could pose new challenges, both for exporters and for the domestic industry.

With the addition of Cove Point, nameplate feedgas demand from US export facilities will rise to 4.2 Bcf/d by late first-quarter.

Combined, that consumption could represent about 5% to 6% of total domestic gas demand this year.

Yet in 2018, Platts Analytics sees LNG feedgas demand averaging just 3.8 Bcf/d, implying that some of the industry's consumption capacity could go unused.

And if lower global gas prices put stronger headwinds on the US export industry, more of that volume could be pushed back into the US market--potentially a factor that's keeping benchmark, Henry Hub forwards prices at just $2.85/MMBtu for the 2018 calendar year.

--J. Robinson, jrobinson@spglobal.com
--Edited by Richard Rubin, richard.rubin@spglobal.com