Global LNG slump hits European hub trade

LONDON (ICIS)–US cargo cancellations over the summer will help slow the rate of global LNG production growth in 2020 to its lowest since 2015, according to LNG Edge.

Spot LNG prices going into the fourth quarter are at the lowest level on record, with the market still oversupplied.

In 2020 LNG production will rise by 3.1% year on year, or by 10.9m tonnes to just under 370m tonnes, according to the LNG Edge supply forecast. This compares with a 12% increase in 2019.

The rate of increase should rise again in 2021, with almost 23m tonnes to be added to the global market, according to LNG Edge.

But much will depend on the evolution of prices, given the option US LNG buyers have to cancel cargoes if margins are unattractive. A repeat of weak summer prices in Asia and Europe next year relative to the US Henry Hub would likely mean further US cancellations. US LNG production climbed close to 5m tonnes per month early in 2020 but has since fallen back to below 2m tonnes in July, with little change expected in August.

Better margins next year could see North American LNG production rise closer to nameplate capacity, of around 68m tonnes. 2020 and 2021 are the two final years of the current supply expansion that started in 2015, underpinned by new Australian and US production. Limited changes are expected in global production outside the US in the short term.

Impact on European trade

LNG cargoes cancelled this summer due to plunging gas markets in both the Atlantic and Pacific basins has meant the appetite to deliver cargoes across the Atlantic has waned, which has struck gas trade.

Reduced interest in delivering LNG cargoes into northwest Europe due to demand uncertainties and poor margins has crushed near-term brokered liquidity across the Dutch TTF and British NBP.

This is a trend that could persist into the last two months of summer with LNG activity not expected to ramp back up to the levels in the first quarter until the start of the gas winter.

At the TTF, over-the-counter (OTC) liquidity after 18-trading sessions in July totalled 1,223TWh at a daily average of 68TWh. At this rate, the monthly total will fall well short of total volume traded in July 2019 – 2,051TWh. This year’s total is unlikely to eclipse 2019’s even after the small increase in churn expected in week 31 for expiring products.

This is a sizeable drop for Europe’s largest traded market which has recorded year on year OTC growth for four out of the six months in 2020 so far.

The NBP has experienced a similar trend, with just 189TWh dealt month to date and is projected to drop well below the July 2019 total of 305TWh. One of the primary drivers dragging overall liquidity lower has been the steep drop in near-term liquidity especially at the TTF.

TTF volumes traded in July for monthly contracts delivering between August and October amounted to 372TWh after the end of week 30. This is compared to 621TWh for equivalent contracts across the same period in July 2019.

US cancellations started to feed into the market in June with just 2.35m tonnes delivered into European terminals excluding Turkey, LNG Edge data showed. This has dropped even further to 2.09m tonnes in July with more cancelled cargoes kicking in for August and September.

TTF benchmark

The TTF has become the global marketplace for participants active in LNG trading.

For producers in the US and lifters in Europe, contracts indexed to liquid hubs such as the TTF provide greater risk management and flexibility than traditional oil-linked contracts. Indexing to the TTF pushes down the price risk for European buyers, many of which are already active on the Dutch hub.

The depth of the TTF curve also allows for hedging across a longer period. This has been a strong driver to the liquidity boom at the TTF before the coronavirus pandemic slammed demand across the globe.

Arbitrage indicators

Market participants indicated that July and August will most likely be the height of US LNG cancellations with a recovery in prices in Europe and Asia seen from October onwards. The TTF October ’20 contract was trading at $2.51/MMBtu during early trade on 27 July around $0.60/MMBtu above the equivalent US Henry Hub contract.

This premium increases to $1.25/MMBtu for November delivery which will encourage strong US imports back into Europe and bolster seller’s appetite once again.

Additional reporting by Ed Cox