The global gas glut continues to grow worse, with LNG prices recently dropping to a 10-year low.
LNG prices in Asia recently fell below $4/MMBtu, down 40 percent from a year earlier. Prices in NW Europe (TTF) are down by nearly 50 percent, and Europe has record-high inventories for this time of year.
Mild weather in Asia, Europe and the U.S. have led to seasonally weak demand, with China in particular proving to be a disappointment to exporters. But a wave of new terminals coming online in the last year has also led to a huge increase in supply, dragging down prices.
That means that major markets will exit the winter season with plenty of inventory, which will likely prevent a price rebound. TTF prices (LNG in NW Europe) for summer delivery are trading at around $3.50/MMBtu. Some analysts think LNG prices could fall below $3 by the summer.
“Importantly, should mild weather or stronger than expected LNG deliveries in NW Europe continue to the point that they would add another 2 Bcm to storage…the market would have to move lower to look for the next lever of adjustment, arguably the curtailment of US LNG exports,” Goldman Sachs said in a report on January 27. “At current US gas forward prices, we estimate this would be tested with TTF and JKM moving $0.60/mmBtu and $0.80/mmBtu lower from here,” the bank said, referring to LNG prices in NW Europe (TTF) and in Asia (JKM).
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In other words, if mild temperatures persist, and the glut grows worse, U.S. LNG exporters not under contract may be priced out. The caveat is that some of the LNG trade occurs under rigid contracts.
But even as some companies have shipments secured under contract, Goldman said that U.S. exporters would likely be the most affected by another decline in prices. “[W]e do not expect other LNG producers to balance the market by curtailing supply. This is consistent with our estimate that US liquefaction facilities face the highest variable cost among LNG exporters given that US gas needs to be bought from the grid as opposed to just getting lifted from the ground,” the bank said.
To be sure, Goldman Sachs said that this remains a “low-probability event,” and it would require LNG prices to fall by another $0.60/MMBtu. But it points to how depressed the market has become.
Such an occurrence would have ripple effects. If LNG exporters were forced to curtail shipments, that would mean that less gas would be leaving the U.S., which would drag down U.S. natural gas prices further. “Further, we note that the resulting decline in US LNG exports would likely pressure NYMEX gas lower still, effectively triggering a race to the bottom,” Goldman analysts wrote.
This highlights how integrated the global gas glut is with the domestic surplus in the United States. Henry Hub is already below $2/MMBtu, at price levels where most gas drillers cannot make any money.
The CEO of EQT, the largest gas producer in the country, said late last year that gas selling at $2.50/MMBtu was too low for anyone to make money, which means they are really hurting with gas at $1.90/MMBtu. EQT’s credit rating was recently downgraded into junk territory, and its share price has plunged by 40 percent in just the last month alone.
Goldman said that in its “low-probability” scenario of the global gas glut affecting U.S. LNG exports, it would result in Nymex gas prices falling as low as $1.50-$1.90/MMBtu.
Another side effect of this gas glut is that the coal industry will continue to get hammered, which would follow a bruising year in 2019.
With all of this said, the investment bank said that the bearish cycle might end in 2021. Lower production in Europe and in the U.S., along with higher LNG purchases, would help tighten up the market. But it won’t exactly result in a significant rally. Goldman forecasts JKM prices in the winter of 2020/2021 at $5.80/MMBtu, and summer 2021 prices at $5.50/MMBtu.
By Nick Cunningham of Oilprice.com