International spot prices have pursued a phenomenal decline in the first five months of the year due to the combined effects of milder weather, COVID-19 driven demand destruction and the ongoing LNG overhang leading to record-high storage levels.
In the second quarter of 2020, the lockdown-induced demand shock combined with LNG oversupply pushed international spot prices to new record lows.
Preliminary estimates indicate that world LNG supply weakened in the second quarter, mainly due to the downward flexibility of US LNG.
LNG is being supplied to Europe at a discount vs. oil-indexed contract prices. Given the extent of oversupply in the LNG market, major pipeline gas suppliers are losing market share.
The US has been the only market to reduce LNG production in a significant manner in response to the weakening of international LNG prices in the second quarter, emerging as a marginal or “swing” supplier for the global LNG market.
The forward curve suggests prices facing continued downward pressure throughout the summer, despite a likely decline in world LNG supply.
The global oil and gas markets are going through an extraordinary period.
Crude oil and natural gas prices have fallen significantly since the beginning of 2020 to reach historically low levels at the end of March.
Before the spread of the 2019 novel coronavirus disease (COVID-19), spot gas prices were already at seasonal lows due to LNG oversupply, an unseasonably mild winter in the northern hemisphere, economic turmoil (trade war between the United States and China) and renewed confidence in future pipeline gas supply in Europe.
China’s gas demand slowed down at the start of the year as the coronavirus outbreak disrupted industrial output. This downturn has gradually compounded the LNG glut on the global spot market and has accentuated the decline in spot gas prices.
From mid-March, the decline in spot gas prices has been further accelerated by the impacts of the lockdowns which have ramped up around the world.
The impact of the recent slump in oil prices on oil-indexed LNG prices will not be seen until late in the April-June quarter because of the time lag between crude oil and LNG prices under long term contracts.
The COVID-19 has already had a devastating impact on global gas demand, which could continue for some time as the pandemic spreads across continents.
A number of LNG projects have already faced headwinds amid the coronavirus outbreak and current low oil prices environment. However, as of today, these projects’ delays do not alter Cedigaz’ view for a well-supplied LNG market by 2025/2026.
The LNG market grew strongly in 2019. Global Imports (net of re-exports and domestic shipment, Fig_1&2) were up by 12.2% to reach 350.5 Mt (+38 Mt Y-o-Y) driven by the arrival of abundant LNG supply. In a context of weak growth in Asia (+5 Mt Y-O-Y compared to +27 Mt Y-o-Y in 2018) , which had been the driving force in previous years, Europe absorbed the bulk of the new volumes (+37 Mt), acting as a market of last resort. In all other regions, combined net imports’ decline was -4 Mt (Includes -2.3 Mt from Egypt in North Africa as it ceased LNG imports). As the growth in LNG supply outpaced demand, prices plummeted, reinforcing the competitiveness of gas in Europe.
Figure_1: Monthly Evolution of LNG Trade Y-O-Y (Mt)