Offtakers from US liquefaction terminal operator Cheniere could turn down more than 10 contractual cargoes in June, market participants said, as US fob prices remain at a discount to feedgas costs.
The operator's fob customers have until 20 April to notify Cheniere that they are turning down their contractual volumes loading in June, allowing the operator to cancel its feedgas nominations ahead of the loading period.
Each LNG cargo holds around 95.4mn m³ (3.37bn ft³) of gas, judging by a historical average cargo size of 165,000m³ of LNG, suggesting that US feedgas demand could fall by around 31.8mn m³/d in June if 10 cargoes are turned down.
Cheniere's term offtakers typically pay around 115pc of the final Nymex Henry Hub settlement for the month in which a cargo is loaded for feedgas, in addition to $2.25-3.50/mn Btu in take-or-pay liquefaction fees, although these may be considered sunk. Feedgas costs have typically held a premium to fob prices in recent months, and although this has not been wide enough to cover the liquefaction fees entirely, the premium has allowed offtakers to recoup as least some of these fees.
But feedgas costs — based on the Henry Hub June contract's latest close — held a 32¢/mn Btu premium to the Argus Gulf Coast (AGC) June fob price yesterday, suggesting that offtakers would likely make losses significantly greater than just their liquefaction fees should they load their Cheniere cargoes. This is likely to encourage offtakers to notify the operator they do not intend to load the cargoes in June.
The number of cargoes turned down by Cheniere's offtakers is likely to be more than 10 — around 25pc of the operator's nominal monthly capacity — market participants said. Spanish firm Endesa in February turned down two cargoes loading this month, and offtakers may have turned down more cargoes loading in May, but this number was likely not greater than 10 cargoes.
Cheniere may decide not to market any turned down cargoes itself, with the AGC June fob price also at a discount of 18¢/mn Btu yesterday to the operator's own feedgas costs — around 107-108pc of Henry Hub. If Cheniere did not market these cargoes, this could remove a significant portion of Atlantic basin supply in June-July.
The AGC July fob price was at an even wider discount to offtakers' feedgas costs yesterday of 39¢/mn Btu. But the deadline for notifying the operator for turning down July cargoes is 20 May.
The wider LNG market has already begun to react to the prospect of slower Atlantic basin supply in June-July, market participants said, with European des prices tightening their discounts to the Dutch TTF gas hub in recent days.
A removal of more than 10 Atlantic basin loadings in June could also boost vessel availability and reduce shipping demand in June. Offtakers holding long-term charters that turn down cargoes from the US may then have spare shipping capacity, which they could seek to sublet on the spot charter market to recoup some of their term charter costs. But those firms that would have been required to secure spot charters to load their US offtake may step away from the charter market, paring demand.
The location of the US relative to its primary Atlantic and Pacific basin demand markets means the country's LNG terminals have the highest supply demand in the global LNG market. Around a month is required for a round trip to Europe, and two months for a round voyage to northeast Asia, suggesting that vessels cannot load twice in the same month from US liquefaction facilities, if they deliver cargoes to these markets.
The potential for greater spot vessel availability against slower demand has weighed on spot charter rates in recent days, market participants said, despite tighter prompt availability in the Atlantic basin.
