With the recovery in crude oil prices, spot liquefied natural gas has assumed the unwanted mantle of the worst-performing major energy commodity this year.
Spot LNG for delivery to North Asia in July dropped to $1.85 per million British thermal units (mmBtu) in the week to May 29, down from $1.92 mmBtu the prior week and matching the all-time low this year reached in the seven days to May 1.
The price is down by nearly three-quarters from the winter demand peak of $6.80 per mmBtu from mid-October, and is almost two-thirds weaker on a year-to-date basis.
In contrast, benchmark Brent crude futures have rallied nearly 150% since hitting the intraday low this year of $15.98 a barrel on April 22, ending at $39.79 on Wednesday.
When it hit the April low, Brent was down 78% from its peak so far this year of $71.75 a barrel on Jan. 8, and it is still down by close to half since that high.
But Brent’s partial recovery is an example of what happens when some supply discipline is applied to the markets.
The Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, in the group known as OPEC+ agreed in April to end their price war and cut output by a combined 9.7 million barrels per day (bpd) for May and June.
So far, the deal appears to be largely holding together, albeit with some countries not cutting by as much as agreed. And the chances are the agreement will be extended for at least another month as both OPEC kingpin Saudi Arabia and Russia appear to back such a move.
What crude oil shows is that having a producer organisation willing to prop up prices by cutting supply gives a better outcome price-wise than allowing only market forces to do the job.
To be sure, the collapse in crude prices did result in involuntary shut-ins of oil wells, particularly higher-cost U.S. shale oil.
In LNG, the situation is more complex than crude. LNG trains are difficult to shut down, or even run at substantially reduced rates, meaning that closing down production is usually the very last option a producer will consider.
As in crude, it seems the bulk of involuntary supply cuts is coming from the United States, where the rising price of natural gas has rendered U.S. LNG uncompetitive in both the key European and Asian markets.
The volume of feed gas going into six U.S. LNG facilities dropped to the lowest level in 9-1/2 months on June 1 amid a wave of cargo cancellations, S&P Global Platts reported.
Some 45 cargoes have been cancelled for July, about double the number for June, Platts reported.
U.S. natural gas futures closed at $1.82 per mmBtu on Wednesday, meaning that once the cost of liquefaction and freight are added in, the cost of delivering a cargo of U.S. LNG to Asia would be at least $5 per mmBtu – more than double the current spot price it would fetch.
At the current spot price, non-U.S. sellers of spot cargoes from major exporters such as Australia, Qatar and Russia are also likely to be feeling the pain.
However, given the bulk of cargoes from those producers are sold under oil-linked, longer-term contracts, it’s likely those are still in the money – especially with the recent recovery in crude prices.
U.S. CARGOES SLIDE
There are already signs of U.S. LNG struggling in Asia, with only 10 cargoes slated to arrive in June, down from 31 in May, according to vessel-tracking and port data compiled by Refinitiv.
The June figure is likely to be the lowest since September, when 10 cargoes arrived in Asia.
The question for LNG exporters outside the United States is whether U.S. production curtailments alone will be enough to balance what is an oversupplied market.
The answer is probably not, given the weak economic growth in much of Asia as countries try to restart economies after locking them down in a bid to contain the spread of the novel coronavirus.
Even China, the origin of the coronavirus and the first major economy to emerge, is unlikely to be enough of a saviour for the LNG market, though its demand has picked up in recent months, with the 5.68 million tons of LNG arriving in May the strongest month since January’s 6.12 million.
It’s likely that the spot LNG market in Asia will continue to suffer from weak prices. And even if there is a recovery, all that will do is bring U.S. exporters back into the game.