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.
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.
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'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.
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.