Liquefied natural gas projects are on the cusp of having to halt output as mild winter weather and the coronavirus cut into demand for the fuel.
Prices for the super-cooled fuel are near a record low as an inventory glut built up during what’s usually a season of peak demand. That, according to analysts and industry researchers, threatens to make LNG producing plants unprofitable from the U.S. to Malaysia.
“We see the U.S. projects struggling,” said Carlos Torres Diaz, senior vice-president and head of gas and power markets at Rystad Energy, said in an interview in London. “We see coal-bed methane projects in eastern Australia struggling.”
The warmest winter on record in the Northern Hemisphere has left storage tanks full at a time they’re usually nearly empty. While demand slumped, capacity to make the fuel is set to extend the record build-out of the last decade, growing 28 million tons this year, according to Rystad, a Norwegian research company.
Spot Asian LNG dropped to record low levels of below $3 per million British thermal units earlier this month. That stabilized as consumers including India started to buy.
If prices drop below $3 per million British thermal units, there is a risk of production output declines at plants including Freeport and Cameron in the U.S. and Santos Ltd.’s GLNG in Australia, according to his research. At $2, many more would be threatened.
Cuts by exporters in Middle East, Russia, and Africa are unlikely because they also produce liquids such as oil condensate or oil as a byproduct, which improves economics and reduces break-even costs, Torres Diaz said.
Producers and traders are closely watching who will blink first and cut output. Vitol Group chief executive officer Russell Hardy said at the IP Week conference in London that levels are now close to where it doesn’t make sense to bring U.S. exports to the market.
Two cargoes from Cheniere Energy Inc.’s plants in Louisiana and Texas for April have already been canceled, though they may be sold back to the market, chief executive officer Jack Fusco said last week.
Malaysia’s Petroliam Nasional Bhd is considering to lower output from its Bintulu LNG export facility in Malaysia, according to people with knowledge of the matter.
Some producers, such as Egypt, may get saved by selling the gas into their domestic markets instead, said Steve Hill, an executive vice president at Royal Dutch Shell plc, said recently. Curbs are a “credible scenario” for a number of producers this summer, he said.
Indonesia may also have to continue export reductions already seen last year, said Sarah Behbehani, senior vice president of LNG at Jera Global Markets in Singapore.
As the coronavirus is causing havoc in markets from oil to stocks, Rystad Energy slashed its global price outlook for LNG this year by about a third for Asia and Europe. China will probably consume only 62 million tons this year, compared with an earlier forecast of 67 million tons and the impact will also be felt in 2021.
Traders should think twice at dumping more cargoes in Europe as storage levels will be at a record throughout this year and remain above average for the next heating season, according to Rystad.
There are no incentives to withdraw gas from storage sites due to mild weather and cheap LNG, Torres Diaz said. Lower European demand for injections this summer will offset the boost in power generation demand from lower gas prices.
“While there is still some potential for coal-to-gas switching in Europe, there is less demand for injections, so gas demand in Europe in 2020 should be flat year on year,” he said.
© 2020 Bloomberg L.P.