LNG demand recovery gradual in 2021
Weak demand, high inventory and numerous canceled cargoes will make for a challenging end to 2020. Experts believe LNG will have a gradual recovery in...
The pandemic's strain on demand growth
A Bloomberg Intelligence report
Weak demand, high inventory and numerous canceled cargoes will make for a challenging end to 2020. Experts believe LNG will have a gradual recovery in 2021, with demand ultimately surpassing supply in 2024.
This report aggregates research and analysis from Bloomberg Intelligence, addressing topics such as the strain of COVID-19 lockdowns on the LNG trade, increasing European gas storage levels, and the longer-term weather effects on natural gas.
LNG demand recovery gradual in 2021
This analysis is by BI Industry Analyst Talon Custer.
LNG glut, low prices persist as demand modestly improves in 2021
LNG trade may be little changed this year and modestly grow in 2021 as demand gradually recovers. Weak demand, high inventory and numerous canceled cargoes will make for a challenging summer, restricting utilization of U.S. export capacity. Benchmark prices should improve from rock bottom next year, but remain pressured by the persistent supply glut and inventory overhang.
Demand, prices may gradually improve in 2021
The pandemic's strain on demand growth may keep LNG trade flat in 2020 vs. the prior year. Canceled and deferred cargoes signal depressed demand this summer as nations slowly emerge from lockdowns. Deferrals from 1Q-3Q could limit 4Q spot activity, while high global gas inventories, particularly in Europe, may cap the seasonal 4Q rise in demand, in our view. Bloomberg reported that companies such as Exxon Mobil and Woodside received Downward Quantity Tolerance requests that can enable importers to reduce volume by up to 10%.
LNG demand could gradually recover next year, with consensus expecting a low- to mid-single-digit gain, driven by Asia, yet winter weather severity is a key variable. Benchmark prices should improve from the 2020 bottom, but stay strained as the supply glut and inventory overhang continue.
U.S. LNG capacity utilization should stay limited in 2021
About 125-150 U.S. LNG export cargoes may be canceled this year in May-October, based on our analysis. The pandemic has hurt gas demand and narrowed or inverted benchmark spreads, making it unprofitable to ship U.S. gas during multiple months, primarily to Europe. Still, an increase in capacity by year-end, driven by additions from companies such as Sempra and Kinder Morgan, should enable exports to increase about 20% to 6 billion cubic feet a day, according to the EIA, albeit at lower utilization.
Export growth next year could be similar as new capacity ramps up, but utilization should remain limited as price pressure and the global glut persists. U.S. LNG export capacity will increase by about 2.3 bcf/d this year, but just 0.6 bcf/d in 2021 as Cheniere's Corpus Christi train 3 is the only plant coming online.
China capitalizes on cheap spot LNG prices
China's LNG imports are up 4% through May despite cargo deferrals and force majeure attempts, according to data compiled by Bloomberg, IHS and Genscape, and consensus expects them to finish 2020 slightly higher than 2019. The country is favoring LNG over pipeline imports and domestic production amid low spot prices as the economy recovers after lockdowns. The nation started importing U.S. LNG for the first time since early 2019, receiving 11 cargoes in April and May, but expectations should be tempered. Despite the phase one agreement and tariff waivers, trade tensions remain elevated.
Sinopec appears to be capitalizing on cheap spot prices along with smaller Chinese entities, and companies in India and Thailand such as Reliance, GSPC and PTT. Poten projects China to resume strong LNG import growth next year.
Going, going, gone… Gas storage to fill up soon
At the current run rate, Europe's gas storage will likely fill up by early September -- almost two months ahead of the seasonal norm. Global LNG glut (due to a mild winter, the Covid-19 pandemic, new production capacity coming online) and wider winter-summer price spreads have lifted gas storage levels in Europe well above the 10-year seasonal high. As coronavirus keeps denting gas demand and storage sites approach full capacity, we expect to see a decline in gas exports (both LNG and via pipelines) to the EU and Britain in 2H and 1H21 vs. the prior year.
This is despite the fact that EU traders will continue to utilize some of Ukraine's spare gas-storage capacity.
FID, construction delays to tighten LNG market
This analysis is by BI Industry Analyst Talon Custer and BI Senior Industry Analyst Scott J Levine.
Delays in construction, investment to spur LNG market tightening
Oversupply and pandemic-induced demand weakness afflicts the LNG industry, but resulting delays in final investment decisions and project construction should tighten the market down the road. We expect few project FIDs this year, if any, and 2021 could be challenged as well. LNG demand should surpass supply in 2024, in our view.
Demand should exceed supply in 2024
LNG demand should surpass supply in 2024, in our view, driven by final investment decision (FID) delays for numerous projects. Proposed terminals with about 230 million tons a year (mtpa) in global export capacity sought FID in 2020, many of which had target start dates in 2024. Some of those weren't going to be built anyway, but the impact of Covid-19 and FID postponements mean even fewer come to fruition. Moreover, projects that eventually make it through likely won't be operational until at least 2025.
We assumed an average annual growth rate of 4% for demand. There is 108 mtpa under construction, but the pace of projects coming online will slow in 2021-23. Shell's LNG Canada and Total's Mozambique LNG are slated for 2025, but we expect both could be delayed to the late 2020s, if completed, further tightening the market.
Competition heats up for U.S. LNG project FIDs
With delays in FIDs due to weak market conditions and the pandemic, proposed U.S. LNG projects with total annual capacity close to 130 million tons will likely compete to achieve FID next year, based on our calculations. The market should stay challenged in 2021, but some potential buyers that have been reluctant to commit to long-term offtake agreements may be more willing in 2021 amid the expectation of a possible supply crunch in the mid-2020s.
Many approved projects aren't viable, in our view, and few may reach FID through 2021. Those with more capacity already contracted have a better chance, such as Sempra's Port Arthur. Lack of liquidity drove LNG Ltd. to sell Magnolia assets for just $2 million.
Multitude of international LNG FIDs delayed
If any liquefaction projects were sanctioned globally this year, we would expect them to be small terminals, with Sempra's Energia Costa Azul in Mexico having the best chance. Exxon delayed FID at the Rovuma project in Mozambique, and it may not be a sure thing next year as difficult market conditions persist and capital spending should still be limited, in our view. Qatar Petroleum is seeking FID for about 49 million tons a year in proposed capacity, and for operations to start 2025-27. We think it could move forward with some capacity over the next 24 months, but not all.
Qatar is already a top LNG exporter and diversity of supply for offtakers is key. There are international projects with about 104 million tons of annual capacity that sought FID this year, according to Poten, most of which have been delayed.
Longer-term weather forecasts
This analysis is by BI Senior Industry Analyst Vincent G Piazza.
There's nothing to excite the gas bulls over the next few months
Demand during summer isn't likely to provide much relief for natural-gas balances if longer-term weather patterns hold through September. We fear the winter 2020-21 futures strip at more than $2.75 per million BTUs may be overly optimistic. While much of the West and New England may be warmer than expected, the Midwest may be closer to normal.
Estimates for cooling degree days, demand proxies for the key gas-consumption summer months of June-September, are about 6.4% below last year, 3.5% below the 10-year average and could fall further if projections turn cooler during the season. Output peaked at more than 96 billion cubic feet a day (bcfpd) in November 2019 and will likely average about 4.5 bcfpd less than 2019. We expect elevated storage of 4.1 trillion cubic feet before winter draw season begins on November 1.