As many as 25 LNG cargoes originally scheduled for June loading from US liquefaction facilities have likely been cancelled as European and northeast Asian spot prices have dropped to all-time lows.
Delivered markets at a tight premium or even at a discount to the Henry Hub have incentivised firms with US offtake to turn down some cargoes, potentially tightening supplies in Europe and supporting prices for deliveries to the region and northeast Asia.
Around 10 Asian and European firms may have cancelled loadings for around 16 cargoes from Cheniere Energy's 25mn t/yr Sabine Pass LNG terminal in Louisiana and 10mn t/yr Corpus Christi LNG terminal in Texas, according to industry participants. Another four firms have likely turned down a total of five cargoes from the 10mn t/yr Freeport LNG export plant, also in Texas, they said.
Fob customers had until 20 April to notify Cheniere Energy if they would not be lifting their contractual volumes from Sabine Pass or Corpus Christi in June. The 14 firms — four of which are from Asia, including Indonesia, Japan and Singapore — have confirmed their cancellations with Cheniere.
"We informed Cheniere [about our decision to cancel June loadings] just before the 20 April deadline," said an offtaker with a portfolio supply agreement with Cheniere. "As long as there is a cancellation clause in your contract [with Cheniere], any firm's request to cancel cargoes should be automatically approved." Cheniere did not respond to requests for comment.
Contracts with Cheniere generally give buyers the option to not lift cargoes, but they are required to notify the exporter 45-60 days in advance of the delivery date and pay liquefaction fees.
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, on top of $2.25-3.50/mn Btu in liquefaction fees. Most of the contracts are signed on a "take-or-pay" basis, meaning that buyers will still have to pay liquefaction costs even if they cancel purchases.
A narrowing of the price spread between European gas hubs and northeast Asia spot LNG in recent weeks amid a slump in prices has effectively rendered the inter-basin arbitrage closed. This means the delivery of Atlantic cargoes to Europe would be comparatively more economical than to northeast Asia.
US cargo cancellations reduce potential supply pressure on Europe, which is the market to which sellers and traders would likely have sent the cargoes had they not been cancelled. The reduced availability of cargoes could lend some support to European gas prices, with a knock-on effect on northeast Asian spot prices. Market participants have typically referenced European gas hub prices as the floor for spot prices in northeast Asia, although the inter-basin differential has narrowed in recent weeks.
European gas hub prices have come under pressure in the past month and fallen to record lows, weighed down by weak industrial and power sector demand because of the Covid-19 outbreak. The June contracts of the UK NBP and Dutch TTF stood at $1.758/mn Btu and $1.994/mn Btu, respectively, yesterday, putting their discount to the ANEA price, the Argus assessment for spot deliveries to northeast Asia, for July at just 19.6-43.2¢/mn Btu, which would not be sufficient to cover the differential in shipping costs between the two delivery markets. A differential of around $0.90-1/mn Btu is required, market participants said.
The arbitrage was likely last open in mid-March, which led to at least one spot cargo delivery from the US to China in April, following China's waiver of duties on US LNG. China is expected to receive around five LNG cargoes from the US this month. The NBP and TTF April contracts stood at a discount of 93¢/mn Btu and 89¢/mn Btu, respectively, to the ANEA price on 17 March, which was sufficient to incentivise the flow of US cargoes to northeast Asia.
Prices for LNG deliveries to Asia have collapsed and tested new lows every day since last week. The Covid-19 outbreak has exacerbated and added further pressure to the global supply glut, with buyers from Japan, India and South Korea requesting to defer their term deliveries amid weak downstream demand.
The ANEA price stood at what is now an all-time low at $1.810/mn Btu and $1.925/mn Btu for the first and second half of June, respectively, yesterday, having lost 27.5-28.5¢/mn Btu, or 10-15pc, since the start of the previous week. First-half June debuted on 16 March at $3.505/mn Btu, while second-half June debuted on 1 April at $2.345/mn Btu.
