The LNG Market Is “Imploding”

While everyone is watching the meltdown in the crude oil market, the global market for natural gas is also cratering.

By Nick Cunningham of Oilprice.com:

At least 20 cargoes of U.S. liquefied natural gas (LNG) have been cancelled by buyers in Asia and Europe, according to Reuters. The global pandemic and the unfolding economic crisis have slashed demand for gas worldwide. Cheniere Energy, one of the main exporters of U.S. LNG, has seen an estimated 10 cargoes cancelled by buyers halfway around the world, Reuters said.

The price for LNG in Asia was already crashing before the pandemic, owing to a substantial increase in supply last year. Prices for LNG in Asia for June delivery have recently traded at $2/MMBtu, only slightly higher than Henry Hub prices in the U.S. As recently as October, LNG prices in Asia traded at just under $7/MMBtu.

The problem for American gas exporters is that after factoring in the cost of liquefaction and transportation, gas breakeven prices for delivering to Asia are around $5.56/MMBtu, according to Reuters. But prices are trading at less than half of those levels.

Gas exports tend to be conducted under rigid contracts, but cargoes are now facing cancellation. “The financial prospects for [LNG], once one of the globe’s hottest energy commodities – seem to be imploding before our eyes,” Clark Williams-Derry wrote in a new report for the Institute for Energy Economics and Financial Analysis (IEEFA). He noted that LNG prices in the fall of 2018 were at around $12/MMBtu.

The oil majors have made large bets on LNG in recent years. Royal Dutch Shell spent more than $50 billion to buy BG Group in 2015. The move back then was made with an eye on surging demand for natural gas. “We will now be able to shape a simpler, leaner, more competitive company, focusing on our core expertise in deep water and LNG,” Shell’s CEO Ben van Beurden said after closing on the acquisition of BG Group more than four years ago.

The deal remade Shell into one of the largest traders of LNG on the planet. Several other oil majors – Total SA, ExxonMobil and Chevron, for instance – have also made massive bets on LNG.

LNG is now arguably getting hit just as hard as crude oil from the pandemic and the global slowdown. A series of high-profile investment delays or cancellations have occurred in the past month. ExxonMobil, for instance, delayed a final investment decision on a large LNG export project in Mozambique in early April.

However, the industry faced troubled economics even before the current crisis. “[C]ompanies pinned the delays on the novel coronavirus, while ignoring the fact that LNG prices were already deflating long before the worst impacts of the pandemic were being felt,” Clark Williams-Derry wrote in the IEEFA report. He wrote that what was striking was the fact that companies of varying sizes and corporate structures were cancelling decisions – speculative startups, but also state-owned giants and publicly-traded supermajors.

Delayed and cancelled cargoes could ripple back up to the upstream sector. The U.S. natural gas industry was also facing problems heading into 2020 because of oversupply. Exports may not provide the demand pull that it once did for gas drillers. Henry Hub prices are stuck at $1.80/MMBtu.

Ironically, however, the share prices of gas drillers have rebounded in recent weeks. Pittsburgh-based EQT has seen its share price double since March, for example. There are a few reasons for this. The Federal Reserve has funneled trillions of dollars into the financial sector, which has re-inflated financial assets of all types. Investors also seem to be trying to “buy the dip.”

But industry analysts are also predicting that a huge shortfall in gas production in the Permian will boost prices by next year. Goldman Sachs says that gas will jump to $3.25/MMBtu in 2021.

For now though, the economics for LNG are pretty dismal. “The LNG industry entered today’s crisis on shaky footing. And now that the economic slowdown is in full swing, all previous LNG supply and demand projections have been rendered moot, and all crystal balls remain cloudy,” Williams-Derry concluded. “In that context, delay is a smart decision.” By Nick Cunningham of Oilprice.com

The US Energy Information Agency (EIA) dissects the historic event of when WTI crude oil futures contracts plunged below zero. Read… Postmortem of the Infamous Day WTI Crude Oil Futures Went to Heck in a Straight Line

Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  66 comments for “The LNG Market Is “Imploding”

  1. andy says:

    Wolf, the bear rally is about where it should be, even better. Timing wise also pretty good. Top formation is happening last few days. I’d say another one-two weeks needed, but huge bubble stocks report earnings all in this week. Concentration on top greater than ever.
    All in all, Im set for next leg down, provided they do not discover vaccine in next few days.

    • Phoenix_Ikki says:

      I like to think you’re right. Seems like all traders are on a really high sugar rush and ignoring everything that’s problematic on the fundamental side. Primary arguments of “Don’t fight the FED” , “This time is different” or “Buy now cause it’s a bargain” there are plenty of cheerleaders to keep this going for a while. Suppose market is forward looking, the way the bubble is re-emerging so fast, they must be forward looking into 2030 instead of the next year or two. Crude down again and Wolf just documented NG also taking a hit..nope doesn’t matter..Rally on!

      If this is truly a bear trap, with market declined and risen so fast, one has to wonder what that next drop is going to look like in comparison to the past or are we forever in the land of unbridled optimism?

      • andy says:

        Well, I suppose there is remote chance Amazon is able to make $billions delivering paper towels and toilet paper overnight for next 2-3 quarters. Or the Fed delivering money paper even faster.

        • timbers says:

          Maybe the Fed will kill two birds with one stone and print toilet paper made of $100 bills.

        • Thomas Roberts says:

          But, then how would you buy the toilet paper? This is a big mystery, needs further study.

        • Crunchy says:

          How would you buy more toilet paper if currency was made of it?

          Easy. The Fed would do a repo, offering fresh new currency for used. Does it all the time.

        • steppenwolf says:

          LOL, Timbers: isn’t that what the fed has been doing?

        • Debt Wazoo says:

          > The Fed would do a repo, offering fresh new currency for used

          More evidence that rehypothecation is unsanitary.

      • Jdog says:

        Just look at a chart of 1929. You will see basically the same thing.

      • rhodium says:

        How do you fairly value a stock anyway. It’s really only worth what someone is willing to pay for it. If someone is stupid enough, maybe they’d pay $1 million dollars for one share of AMZN right now. Will anyone else buy it from them for more? Depends on how stupid they are, but if they do then the first guy wouldn’t look so stupid anymore. This is kind of what the Fed has done, encouraged a bunch of people to be stupid and then look smart for it as others begrudgingly join in.

        The problem is now they’re in the habit of being stupid and ignoring reality. Maybe by dumb luck some people will get out near the top, but a lot won’t.

        Or… Or… The buying will simply never stop and everyone else will look like fools because the bubble won’t be a bubble and stock market capitalization will multiply up to astoundingly massive multiples of gdp, because gdp is irrelevant to investors who shine like the sun.

        • andy says:

          Yes, perhaps Bezos will buy Amazon stock from himself for a million per share and become first ever Trillionaire, who’s to stop him.
          Btw, I tried this with thinly traded options for experiment, but they frown upon such things and will freeze your account if needed.

        • ricardo2000 says:

          ricardo2000 replies to: ‘It’s really only worth what someone is willing to pay for it. If someone is stupid enough, maybe they’d pay $1 million dollars for one share of AMZN right now.’
          The problem with this social strategy is that such a market can go from worth less to worthless in minutes or days. These investments are spectacular misapplications of resources. The investment should have been in people and activities that benefit society for decades.
          This pandemic illustrates the point brilliantly. The world, especially the US, should have invested in medicine instead of the stock market and the illusion of strength provided by an obese military. Society would have been protected, people would have barely suffered, and the economy would have rebounded almost immediately. Now the economy looks to be shattered starting with energy production and distribution, and continuing with agricultural production. These two activities are the base of every mass civilization. Once they collapse everything else follows down with them.

    • timbers says:

      Interesting. But how are bailouts supposed to be reported in corporate earnings? How will they impact reported “earnings” given how fraudulated earnings reports have become? Will bailouts create more opportunities for fraudulation? Anyways since bailouts are now The Standard Opporating Procedure SOP) for corporate America, they should be GAAP-ified that’s for sure.

    • Raymond Rogers says:

      If there was an extinction level asteroid imbound in 24 hours the Dow would be +1000

      If it was inbound in 23 hours +2000.

  2. 2banana says:

    Cheap and easy money meets the greater food theory of investing.

    “The Federal Reserve has funneled trillions of dollars into the financial sector, which has re-inflated financial assets of all types. Investors also seem to be trying to “buy the dip.”

  3. Shiloh1 says:

    Wonder how the marine cargo and liability insurance market is underwriting and pricing all of these crude oil and LNG tankers concentrated together just outside of various ports, some with serious quake / tsunami exposure.

    • char says:

      Tsunami´s are not dangerous out on sea. But you do have typhoons there

    • Debt Wazoo says:

      You have to be pretty close (in tanker terms) to shore to get tsunami damage.

      Out in the open ocean it’s just a super long gradual wave. It isn’t until it reflects off the shallow water seabed that you get violent movement.

  4. char says:

    That is $2 mmBTU LNG. You burn LNG to move it to East Asia. You burn gas to turn it liquid. So the real price is lower than at the Henry hub because in reality it contains much more gas out of the well.

    What is weird is that the main markets for gas, all East Asia, are not suffering that much from C. Could be that oil is so cheap and plentyfull that oil is burned instead of gas

    • Thomas Roberts says:

      No, natural gas is needed for alot of industrial products and other uses. It’s also used for electricity generation and can be directly used for specific internal combustion cars/buses/heavy trucks that are designed around using it.

      Oil and natural gas can be used to substitute each other to an extent, but you have to have the setup to be able to switch, you wouldn’t normally be able to rapidly switch from one to the other.

      China is being hit very hard economically, because, of the shutdowns in America, Europe, and the rest of the world and China’s economy is not doing well, because of that, it’s being hit far more, because, of shutdowns in the rest of the world than even what CCP19 has done internally to them.

      China despite their claims, has been hard hit by CCP19 and still has breakouts and continues to have lockdowns across the country. Their infection rates and death rates are not believed even by their own citizens, although China has been successfully starting to convince it’s own citizens CCP19 didn’t start in China and that China wiped out infections inside China and that foreigners are to blame for all new infections. Even though very few foreigners left and came back, their own citizens were far more likely to do that. But, of course China, never defeated CCP19 in the first place.

      • paul easton says:

        Of course they might be lying but how can you be so sure of that?

        • char says:

          Because if China wasn’t lying than in this case their government would be better than ours and that can’t be true

        • Thomas Roberts says:

          Char, no one believes the Chinese numbers, because they aren’t true. America is very corrupt, yes, but, China is total corruption. The CCP can literally steal anything they want or kill anyone they want at any time. They have brainwashed their population and are currently blackmailing the rest of the world. While, the rest of the world could start to take action against China today, most are going to wait until CCP19 is over and dealt with and then take action against China.

        • char says:

          Chinese numbers are not true, but so are the Italian, or Spanish, or Dutch, and the German numbers are laughable untrue. So what is your point. Are they untrue but untrue like the Spanish or do you mean something else. During a epidemic it is just hard to keep book. It should also not a priority at that moment

  5. Tom Stone says:

    There’s nothing but blue skies and hard times ahead.
    Enjoy those views while they last!

  6. DR DOOM says:

    LNG cannot compete with a pipeline or down-stream trunk distribution. The development of pipelines (LNG Kryptonite)have been hastened by the neo-con policies of sanctioning countries which forces them to cooperate with one another against Washington. I heard not one report from the security complex corporate MSM when the large Sino-Russian pipe line was brought on line. Nord Stream 2 has cleared the Danish Government last hoop. Germany will be the gas company of Europe distributing Vlad Gas.It’s a done deal despite the Swiss Pipe service ship leaving the project after getting strong armed by threat of sanctioning from whom else ? Washington . The Wet Dream of LNG and the price of natural gas feed stock for LNG is not ,as Paul Harvey said ,”the rest of the story”

    • char says:

      Vlad gas is from a very untrustable company. Some say that there is only one crew more untrustable in the whole wide world. A truly untrustable crew that have only kept word by accident. But Washington does not want to understand that.

      • Thomas Roberts says:

        ???

        I doubt it. Russia is more stable than Asia, the Middle East, or Africa for sure. Compared to the America’s or the rest of Europe you can argue, but, if stability is your concern, cut these others first.

        • char says:

          I understand why you don´t want to understand it. If i were you i wouldn´t want to either

        • paul easton says:

          @char – In our MSM it looks like all almost USIANS are dummies, but here I get a different impression. But maybe that’s because I assume people are USians when they are not. It would be very helpful WOLF if the headings included location information.

      • Frederick says:

        Char More “ Russia bad” propaganda right Been partaking of some CNN koolaide lately This Russia bashing is getting old

      • paul easton says:

        If European countries don’t trust US why do they act as though they did? Are they just too cheap or lazy to start their own protection racket?

        • char says:

          Because it the don asks you if you trust him it is better to say yes. It seems to me to be something obvious

      • Thomas Roberts says:

        Yeah Okay char,

        At first I thought you might be referring to Saudi Arabia or Qatar. Now, I’m guessing you’re referring to the fracking in America, which everyone on this website, already knows is a scam. Whatever, you are referring to, I am sure I’m already aware of it.

        • char says:

          No, you are not. Though it was always a big question if fracking would be able to export gas in the long term. Old-fashion gas does not have that problem because boring the well and laying the pipeline were the big costs and and after you did that the money would roll in (to pay off the bank). With fracked gas you need to continually pomp money (& guanxi for new drill licenses) in to keep the gas pipeline filled. Something which is much harder to sustain.

          It is more political and the habit off some nations to force other countries to follow their command. Russia has never stopped supplying gas during the winter, though there is always that treat. But other countries will do that even when the gassification plant hasn’t even be finished

    • paul easton says:

      You mean I get a choice of buying gas from the don or vlad? Excuse me I would prefer not to sir. I will move around on roller skates. I will mount peddles on my computer. I will heat my home by burning natural self-generated biogasses.

  7. polecat says:

    ‘Ha!” .. welcome to Saudi Merica.

    What were we thinking ?? Why “Fungibility!”, of course! So now, who coulda thought a tweensy weensy tiny teeny little virus could do So • Much • DAMAGE.

    Homo sapiens sp. economus var. ‘Hubristically stupid’

  8. HK says:

    I wonder how many of the recently permitted LNG export facilities in the US will be built.

    • MC01 says:

      They are child’s play compared to North Field East (NFE) in Qatar, which when fully developed will raise the Gulf state’s LNG export capacity from 77 million tons per year to 110. Oh, and then will come North Field South (NFS) which will bring Qatar’s LNG exports to a colossal 126 million tons per year.
      Even before the Covid-19 epidemic exploded there were doubts, serious doubts I may add, about the financial viability of such a massive expansion project and the Qatari government was continously rumored to be “very near” to delaying or even scrapping these new developments.
      But work started on March 29 and if anything Qatar Petroleum executives now seem more concerned with troubles bringing foreign contractors in to work on NFE than with anything else. In fact they sound mildly annoyed NFE may be six months late, to the point they have been discussing hiring extra contractors from China to make up for the lost time.

      There’s something very very strange afoot in the energy markets worldwide, and I am not talking about the recent uproar in WTI futures.
      Gulf producers seem unconcerned, even unfazed I may add, by disruptions caused by the Covid-19 epidemic. Their East Asian customers seem more concerned with not having enough storage capacity for all the cheap crude and NG they are buying than with any possible economic disruption down the road.
      In the meantime us Westerners are either running around with our hair on fire or still hiding under our beds. Our energy policies are in tatters, regardless if we are energy consumers or producers. Are US and Canadian fracking outfits getting a bailout? Yes! No! Maybe! No, wait: we don’t know.
      Dealing with the monster backlog of oil tankers and LNG carriers outside oil ports such as Augusta and Fos-sur-Mer is being left to plant managers: government officials are too busy threatening joggers with Hellfire to concern themselves with such thrifling matters.

      But what do we expect from countries and especially governments that want to spend all eternity hiding under the bed?

      • tom says:

        No evil fracking? Does that mean we can make coal king again?
        Not sure which one provides proper safe spacing.

        In our state, law enforcement made a risky & brave raid on a dog groomer.

        • MC01 says:

          East Asia is already Making Coal Great Again by sending a stream of bulk carriers to Australia, Indonesia and South Africa. Heavy machinery needs no social distancing, but Asia needs steel to restart her economy. Plenty of it, if marine traffic is anything to go by.

          The stream of traffic between Newcastle (NSW) and Port Headland (WA) and the great bulk ports of China, Japan, Taiwan and Korea right now is something that literally defies belief: you’d never say whole sectors of the world economy have been taken behind the shed and shot.

          PS: when that kind of stuff happens, one or more sycophants are involved. At least one (in the original Greek sense) to snitch on the poor devil and another (in the modern Anglo-Saxon sense) in the press to advertise these daring deeds.
          Be a responsible citizen and practice social distancing from both kinds: they are far more dangerous than any virus.

        • paul easton says:

          @MC01 – I am trying to figure out what you said. East Asian countries are buying huge amounts of Austrailian ore to make steel to make factory machinery. In present global economy that seems weird. So far so good.

          Then you say “When that kind of stuff happens”. Now I am lost. What kind of stuff? Which poor devil? WTF?

        • paul easton says:

          @MC01 Do you mean they are using steel to make pipelines? Does that mean SaudiAmerica is shut out of the loop? Or do you mean SaudiAmerica is getting a divorce?

        • MC01 says:

          Paul: I was referring to Tony’s mention of a police raid on a dog groomer. Sorry for not being clearer but I am operating on short sleep rations and my brain not functioning well sleep without.

          Steel is still the basis of all industrial economies. It’s needed for everything, from rebar in China’s ghost towns to the hull of the enormous brand new Hyundai container carriers being delivered just now.
          After WWII steel was so vital around here people made a little money on the side by looking for and selling scrap metal by the wheelbarrow- or even the bucket-load. I was born and live in an industrial district (or what remains of it; I’ll learn soon enough) so for me steel is just one of those things the world cannot exist without.
          All that marine traffic means Asia, in the specific China, Korea, Taiwan and now Japan as well are revving up their economies, in the specific their manufacturing capabilities.
          What is the rest of the world doing? Some countries (Germany, Denmark, Austria etc) are waking up, but the others are still hiding under the bed with zero intention of ever emerging.

        • char says:

          After Tirol i would advise Austria to do it slowly.

          I’m of the opinion of bringing it down to zero new infections and than restarting the economy but some states see others doing it so they must do it too. I hope that they don’t need to do a second lockdown in August. But i fear the worst.

        • paul easton says:

          Ok then East Asia is tooling up. They are ready to make huge amounts of goods and sell them to each other. Thank God for that I say. I am sick and tired of consuming. Let someone else carry that burden for a while. Give me a break.

          But actually I think everyone should hide under the bed and stay there till they die, except for people working on climate change solutions. It is the only way to keep the biosphere alive.

        • char says:

          Hiding under your bed until you die is a climate emergency solution.

          ps. Do use the proper lingo.

        • paul easton says:

          Hiding under the bed won’t help you unless everybody does it, so please make sure to call out the selfish people who think they can get away with remaining in the open and keeping their lights on.

  9. Jdog says:

    Does this mean all that the 9 billion Sempra spent on that LNG export facility in Texas was a gigantic waste of money?

  10. Jim says:

    Hello from Darwin, Australia…home of free LNG for export. Here’s a tale of the negative externalities of the LNG boom/bust.

    Japan needs LNG, so a company called ‘INPEX’ was created to develop an export hub in the hydrocarbon rich Northern Territory. The Japanese borrowed in Yen at near nothing, and spent $53 billion AUD (back when it was high) to create an export hub. Signed contract for decades into the future at rock bottom prices.

    One amendment in the contract was that the LNG plant had to be repaid, prior to any local royalties were paid. Try paying waiting until $53 Billion is paid back before seeing any money.

    First came the boom. High rents, property values eclipsing Sydney. $100-250K jobs for tradesmen.

    Now that construction is finished ~10,000 workers have left and the Territory is in a depression. Highest arrears (defaults) in the country, and no jobs, nor growth. We have the highest gas prices in the country; despite exporting gas…the irony! The environmental impact of burn-offs doesn’t bother the local greens. Because they are fucking idiot too. Gas is ~1/2 the carbon of coal….and considered ‘clean’. Darwin is literally breathing in the exhaust of ~530 megawatts of power needed to compress this gas for export.

    From the esplanade overlooking our harbor, one can watch large supertankers come empty, and leave fully loaded. Yes, there are ~1000 local jobs at the plant, but the gas is just given away.

    The Japanese bombed Darwin in WW2, yet…it was by giving Australia cheap financing did they actually get this country’s resources for free. Well done, advance Australia fair.

    • td says:

      Is the payback in $AUD or $US? If the later, so much the worse.

      • Jim says:

        Australia became the number one gas exporter in the world…by giving it away. Qatar is number 2, and possibly makes money. (I am assuming in AUD), nearly 26x more profitable (pre-crisis).

        “In 2017-18, LNG companies in Australia had revenue totalling $29.7 billion, yet paid just $1.07 billion in royalties levied under the petroleum resource rent tax (PRRT).

        By comparison, Qatar, a close second behind Australia in production, received a staggering $26 billion in royalties“

    • Auld Kodjer says:

      C’mon Jim. Complete the cathartic confession by reciting who they sold the Darwin port to as the pinnacle of Strayan dumbfuckery

      • Jim says:

        Per the Selling the Port of Darwin to the Chinese…

        Chris Rock: “what the difference between a new prison, and an old housing project…” (little difference, you tell me)

        By selling the port for $500mil, a new prison was paid for in Howard Springs. Yes, the “Traditional Owners” of Cell Block 4.

  11. Willy Winky says:

    BREAKING NEWS: Elon Musk Hired by Big Oil to Turn Things Around

    A consortium of oil and gas producers including Exxon, BP, Mobil and others have announced they have hired Elon Musk to help them deal with the collapse in oil prices.

    The oil industry is currently bleeding billions of dollars as they lose money on every barrel pumped with prices under $20.

    A spokesperson said ‘Musk is a genius at increasing shareholder value while losing thousands on every unit he sells so we expect he will be able to drive our share price higher as we lose even more money per barrel.’

    One analyst said ‘I am excited! We have a strong buy recommendation on all Big Oil shares’

  12. timbers says:

    The internets say a Fed bailout of gas/oil won’t help the industry.

    Silly rabbit.

    That’s not what a Fed bailout is supposed to do. As long at the “investors” and “markets” are rewarded, the Fed’s job is done.

  13. Storage constraints for gas are different than crude. The Fed may have propped up corporate investment for a bit, and extend (Fracking) oversupply dynamics. Once the industry stops pumping crude the supply of gas drops. They bring parts of the economy back on line. LNG would be vulnerable, while NG prices are rising and domestic demand. A matter of timing and political policy. NG has a built in BTU discount to gasoline, the benefit is provided to government and essential services, not retail. More CNG cars and the US can keep gasoline prices low for much longer. The trade off is geopolitical, Japan and Europe. Once the dollar reverts to the mean LNG will resume, with US getting first over move back into global trade. Russia will not miss the chance to bleed Europe, and dysfunctional Japanese economy in the age of rising Chinese ambition. US will have to come to their aid, at a price.

    • paul easton says:

      An offer we can’t refuse for a price we can’t afford?

    • char says:

      NG does not have a discount, oil has a large premium because it can be used in transportation. According to the first web page i googled 1 barrel of oil is 5.5 mmBTU so the premium for oil is often big.

      A country can start thinking about returning to global trade after it has defeated C19. The US is not a country that seems to be on the rightway to do that. In fact i think that they are following the wrong way

Comments are closed.