Europe can no longer absorb excess gas supply as economies across the EU juddered to a halt as strict corona containment measures remain in place. An increasingly saturated European gas market has sunk TTF prices today under $2.30/mmbtu.
“Japan will potentially declare a state of emergency as early as today in Tokyo and six other regions. India’s nationwide lockdown is choking energy consumption and raising fears of a humanitarian crisis,” said Wood Mackenzie Asia Pacific Vice Chair, Gavin Thompson.
Shut-ins of uneconomic production, notably at the U.S. Gulf Coast, is hence seen as the last mechanism to gradually rebalance the market. The WoodMac data supports the argument that this should be happening more, but to date, US LNG liquefaction utilisation has been robust despite the economics of much US supply not being supported by European or Asian gas prices.
Bleeding cash
“Any US LNG delivered into Europe this summer in this cost band is bleeding cash,” Thompson said, suggesting this situation cannot go on for much longer.
Even the most efficient liquefaction plant in the US cannot support a negative spread between feedgas costs – highly correlated to Henry Hub – and FOB LNG prices (currently around US$1.60/mmbtu). Prices are now effectively being set by a netback from TTF; however, the discounts from on-the-water US LNG to accessing TTF have increased as utilisation of European terminals has grown.
Imports into Northwest Europe in Q1 were close to 50% higher than the same period in 2019,“ said, stressing: “Any cargoes sold at this price level are effectively distressed.“
The big question is if Henry Hub falls further and pushes US liquefaction back into positive territory. In Thompson’s view that “doubtful,” as current prices are already below sustainable levels and US producers are cutting investment as both oil and gas prices slump. “The likely loss of some associated US gas supply could hurt US LNG producers further,” he argued, “although the impact will only likely be felt by 2021 due to the delayed nature of drilling reductions.”