The trade war and implications for U.S LNG

Feb 13, 2020 | By Joe Webster

An umbrella in a hurricane: the pause in the US-China trade war and implications for U.S. LNG

The US and China have reached a (temporary) truce in the trade war, raising hopes that U.S. LNG exporters can tap demand in the world’s second largest LNG importer. We are skeptical that Chinese buyers will ink long-term contracts with US LNG exporters, however, given persistent political and economic uncertainties. Chinese buyers may instead seek supplies from U.S. LNG exporters via the spot market or short-term (12-60 month) contracts, which would do little to advance the 2^nd wave of LNG projects awaiting a Final Investment Decision (FID).

Developments in US-China economic negotiations do not change our outlook for this year. From the perspective of U.S. LNG exporters, the pause in the trade war is like having an umbrella in a hurricane: better than nothing, but not too helpful. Freezing trade tensions does little to address the structural factors weighing on LNG prices: world LNG markets continue to face a supply glut; world economic growth has stalled and may face significant downsides (including the uncertainties posed by the nCOV coronavirus); and warm winter temperatures are leading to storage builds. We expect this year will be very difficult for U.S. LNG exports even if Chinese tariffs on U.S. LNG are lifted.

U.S.-China trade deal: limited (but potentially significant) effects

Few market participants believe Chinese buyers will sign medium or long-term contracts with US buyers. Given the probable recurrence of US-China political and economic tensions, most Chinese buyers will likely continue to avoid long-term contracts with US LNG exporters, particularly when they can buy pipeline natural gas or LNG from alternative suppliers. Chinese buyers could, however, pursue short-term (12-60 month) contracts with some US exporters or buy more on the spot market.

Cheniere may be well-positioned to benefit from greater Chinese short-term/spot market purchases. Cheniere’s Sabine Pass and Corpus Christi terminals are currently producing about ~0.7 Bcf/d and ~0.3 Bcf/d of non-contracted volumes, respectively. Cheniere terminals therefore may have the capacity to absorb short-term contracts of about ~1 Bcf/d – if North Asian spot prices are cooperative.

World LNG markets are oversupplied

U.S. LNG exporters may not be able to ship short-term spot cargoes due to severe price headwinds in Asia and Europe. North Asian spot LNG prices have hit historic lows, sliding to a new low of just $2.76/MMBtu on February 10^th, 2020. It is very difficult for U.S. LNG terminals to support spot cargoes to Asia at those prices. Still, as Platts noted in a recent article, some U.S. exporters may be able to achieve short-term positive netbacks through a combination of low shipping and feedgas costs, financial or physical hedging, and forward JKM curves in contango.

LNG markets could continue to be oversupplied for some time. Qatar, Russia’s Arctic 2, Papua New Guinea, Mozambique, and Nigeria alone could bring ~120 MTPA of new capacity online by 2027. Analysis of Shell’s LNG demand forecast suggests the world’s biggest LNG player expects incremental demand from 2020 to 2027 to grow by about ~130 MTPA. Even if demand rises as forecasted, U.S. LNG exporters will have to outcompete international LNG suppliers.

LNG demand may slow

World LNG short-term and medium-term demand may slow amid macroeconomic developments in key markets. The International Monetary Fund predicts “global growth may be stabilizing, though at subdued levels.” The IMF projects world GDP growth of just 3.3% in 2020, down 0.1% from its previous forecast. Short-term and medium-term economic risks are particularly acute in India and China – the two markets which contribute the most incremental demand for LNG. The Indian financial sector is displaying worrying signs of stress; China’s financial sector is highly opaque but could pose even greater risks to the world economy. The nCOV coronavirus could further compound these risks, limiting world economic growth and demand for LNG. Finally, moderate winters in Europe and Asia are dampening LNG demand, increasing natural gas storage levels, and further pressuring short-term LNG prices.

Still, there are potential bright spots for U.S. exporters. Petronet and Tellurian’s Driftwood LNG may soon finalize an offtake agreement. The contract would bring Driftwood’s total secured commitments to 9 MTPA, potentially pulling the Louisiana project over the FID approval finish line. Sempra also seems to be making progress in negotiations with Saudi Aramco for an LNG offtake agreement for Port Arthur LNG.

It could be a brutal year for LNG exports

The LNG market is oversupplied, there are significant downside risks for world LNG, and geopolitical risk remains as uncertain as ever (for instance, we won’t be surprised if US-China tensions resume amid frictions over Huawei/Meng Wanzhou). The pause in the US-China trade war could support U.S. LNG exports in the short-term but will likely not address the fundamental causes of the LNG supply glut. Indeed, some analysts are warning of production pauses at existing terminals in 2020, particularly during off-peak months. It could be a brutal year for U.S. LNG exports and U.S. natural gas producers.