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GNL | Gas natural

US LNG shut-ins 'unlikely' despite unfavorable netbacks to Asia, Europe

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US LNG shut-ins 'unlikely' despite unfavorable netbacks to Asia, Europe

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Prices in both Asia and Europe weaken further Friday

Potential for US gas to be used locally

Large premium still seen for winter delivery contracts

London — The US is not widely expected to reduce LNG exports in the short term despite the fact that weak pricing in Asian and Europe has seen nearly uneconomical netbacks to these key markets, according to European market participants.

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The JKM - the benchmark for LNG spot delivered into southeast Asia - was assessed at $4.267/MMBtu at the end of Week 21, the lowest price for the contract since April 2016, S&P Global Platts price data showed.

Pricing in Asia has softened in recent days as a combination of solid term supplies into the region and weather forecasts not indicating a heat wave continued to dampen demand for spot LNG volumes.

In addition, the NBP June and July contracts have both broken cleanly below the 30 pence/therm mark in recent days, with the July contract having dipped below the 28 p/th mark in afternoon exchanges.

European hubs have been under pressure this summer on record-high LNG volume deliveries in addition to a large storage overhang carried over from the Winter 2018-19 delivery period.

As a result, both the JKM and NBP prompts are now largely in line with the cost of delivered US LNG into their respective markets.

In recent delivered deals of US cargoes into the Pacific, BP sold a cargo to JERA for July 5-7 delivery into the Asia Pacific from Cove Point at $4.40/MMBtu in the JKM Platts Market on Close assessment process on May 24.

LIMITED SCOPE FOR SLOWDOWN

Nonetheless, market participants believe that there is very limited scope for the US to reduce the volume of LNG exports.

"It is unlikely," said Jean-Christian Heintz, Head of LNG Broking at SCB Brokers, adding that a shut-in is "technically challenging, no producer likes to shut down a train as it involves a complex restart process. Commercially, it would not give a good signal, at a time when we expect new FIDs."

Heintz added that the weak Asian and European pricing was "an opportunity for the producers to expand their footprint elsewhere, which can be seen as a long-term investment, a put option, and to target new markets."

Thierry Bros, senior research fellow at the Oxford Institute of Economic Studies, said that "the US will continue to produce. To stop, they must be certain to have no option over the next two months and be certain of a negative margin during the period."

Bros also said that with the heavy maintenance period on the Norwegian Continental Shelf still to come and heightened concerns surrounding Groningen production, "the decline in European gas imports will be through a decrease in production and pipeline flows and not from LNG."

A Switzerland-based LNG trader said that "they [the US] won't stop gas production, but if LNG exports don't make sense anymore, consumption will have to happen locally through coal-to-gas switching."

Moreover, current price signals point to higher pricing in both Asia and Europe in the coming months.

The JKM Q4 2019 contract was assessed at $6.715/MMBtu on Friday with Q1 2019 even higher at $7.925/MMBtu. Similarly, the NBP Winter 2019 contract was seen trading at 52.40 p/th in mid-afternoon exchanges, more than 20 p/th higher than the June contract.

-- Gary Hornby, gary.hornby@spglobal.com

-- Lucie Roux, lucie.roux@spglobal.com

-- Desmond Wong, desmond.wong@spglobal.com

-- Edited by Jennifer Pedrick, newsdesk@spglobal.com