Bearish Outlook Sparks US LNG Cancellation Fears

Cargo cancellations by contractual offtakers of US LNG volumes could be triggered due to falling European gas and LNG prices, muted demand in Asia and the growing number of vessels acting as floating storage, according to market sources polled by Energy Intelligence. This would be the first time such a wave of cancellations could occur since the summer of 2020, when spot prices were hovering at around $2 per million Btu due to the effects of the Covid-19 lockdown measures.

Given that contractual buyers of US LNG must give advance notice about their intention to cancel a cargo up to two months ahead of the loading date, and the fact that the latest US feed gas data shows no major drop in flow rates into US export plants, it looks unlikely that cargo cancellations will occur in June or July. However, question marks remain over what could happen to cargoes for August and September delivery. In July 2020, up to 45 US LNG cargoes were cancelled due to the extremely bearish pricing environment, and the total number of cancelled cargoes between April and October 2020 is estimated to have surpassed 100 vessels.

Asian and European spot LNG prices are currently at close to their lowest levels in 25 months due to comfortable supplies and slack demand in Europe, as well as a lack of LNG buying appetite from Asia. Spot LNG prices in Southwest Europe and Northeast Asia both settled at $8.80/MMBtu this week, an almost $12 and $18 drop, respectively, since the beginning of the year, Energy Intelligence’s latest price assessment shows.

While current spot LNG prices remain above those levels seen during 2020, a bearish pricing outlook has fueled market speculation over potential US cargo cancellations. “The problem is that despite the price drop in Europe, industrial demand is not coming back,” an LNG trade analyst at a European major says, most likely because of price contango on the gas curve. Meanwhile, limited spot buying activity from Japan and South Korea is weighing on the Asian market. “Unless the Chinese return on the bid, then we need to cut supply,” the analyst adds. Chinese LNG buyers remain cautious to return to the market, contrary to some market expectations at the beginning of 2023, and that trend is not expected to change for the time being. “We are not in a hurry now [to buy spot LNG] and some of us even think we may see US cargo cancellations this year,” a Chinese LNG trader tells Energy Intelligence, reinforcing the bearish market outlook for the upcoming months.

Another LNG analyst at a European commodity trading house believes cargo cancellations are still some way off, as the market still has not reached the conditions to spark US LNG cargo cancellations. The number of vessels acting as floating storage offshore Europe need to grow massively before cancellations occur, the analyst says. A high floating storage count would weigh on European hub prices and would “break” the spread between the Dutch TTF, Europe’s benchmark hub, and the US’ Henry Hub, acting as the driver for potential cargo cancellations.

However, the analyst source notes that much could happen before floating storage accumulates to such dangerous levels. “If the market tries to fix itself quickly, then likely we won’t see that [cargoes being cancelled],” he says. Floating storage count in Europe is currently limited to only a handful of cargoes. A total of 240,000 tons of LNG was floating off European shores on Jun. 6, according to data from commodities analytics firm Kpler. In Asia, about 350,000 tons of LNG was floating on the same day.