Gas 'Witch's Brew' Has U.S. Exporters Facing Worst-Case Scenario

A global glut of natural gas has gotten so massive that U.S. exporters could soon face their worst-case scenario: Halting shipments to get supply and demand back in balance.

Monday, November 25, 2019

By Naureen S. Malik and Anna Shiryaevskaya


(Bloomberg) -- A global glut of natural gas has gotten so massive that U.S. exporters could soon face their worst-case scenario: Halting shipments to get supply and demand back in balance.

Prices for the heating and power-plant fuel may collapse in Europe and Asia next year to levels that would force U.S. liquefied natural gas suppliers to curb output, Citigroup Inc. said in a note to clients last week. Morgan Stanley sees as much as 2.7 billion cubic feet a day of American exports curtailed around the second or third quarter, assuming normal weather. That’s about half the volume now being sent abroad.

China’s demand for U.S. LNG has plunged amid the trade war, while Europe’s gas storage is almost full and tankers carrying the fuel are taking unusually long journeys in search of better prices. That’s created a “toxic witch’s brew” that’s making it harder to find a home for American exports, according to Madeline Jowdy, senior director of global gas and LNG for S&P Global Platts in New York.

“It’s also a harbinger of bigger troubles ahead for U.S. exporters in the second quarter of next year, when global demand is at its weakest point and the U.S. will have even more volumes to place” as new export terminals start up, Jowdy said in an email.

Capping LNG production is an extreme measure, but the idea is gaining traction as new terminals from the U.S. to Australia unleash exports faster than demand can catch up. Gas for near-term delivery in Asia has lost half its value in the past 14 months, with the Dutch benchmark nearly matching that decline. A mild winter would make the glut even worse -- bad news for U.S. suppliers like Cheniere Energy Inc. and Sempra Energy.

In the past three years, soaring gas output from shale basins has vaulted the U.S. into the ranks of the world’s largest LNG producers. The nation is widely seen as a so-called swing supplier because its exports can respond quickly to a volatile market.

Curtailments can happen when customers such as trading houses, which resell the fuel to utilities and other end users, refuse to load cargoes because prices are too low to cover shipping costs and still make a profit. The cancellations can force exporters to cap, or “shut in,” LNG production as their storage tanks fill up.

While customers of American LNG export terminals have to pay a fee to reserve the fuel under long-term contracts, they can opt out of buying with 30 to 60 days’ notice. That’s in contrast to traditional contracts from suppliers like Qatar and Australia, which require buyers to take or pay for a fixed amount whether they need it or not.

Singapore’s Pavilion Energy Pte said this month that it canceled the loading of an LNG cargo from the U.S., though Pavilion said the decision was based on logistics and didn’t directly attribute it to low gas prices. But additional shut-ins of American exports could follow, Michael Webber, managing partner of Webber Research & Advisory LLC, said in an email.

With the exception of the Pavilion cargo, though, buyers of U.S. LNG have continued to load shipments. Traders will likely need to have a view of at least two months out to cancel, Peter Abdo, chief commercial officer for LNG and origination at Uniper Global Commodities SE, said at the Bloomberg Commodity Investor Forum in London this month. Uniper doesn’t plan to refuse cargoes, he said.

The top executive at Cheniere, the largest U.S. gas exporter, has dismissed concerns about shut-ins.

The question “never ceases to amaze me,” Chief Executive Officer Jack Fusco said during the company’s third-quarter earnings call last month. Cheniere’s cargoes “are extremely competitive,” Fusco said. A representative for Cheniere declined to comment on possible LNG production curtailments, while Sempra declined to discuss commercial arrangements.

So far, the premium for winter gas over near-term prices has spurred record American shipments. But European gas prices could potentially slip below $3 per million British thermal units in the spring and summer, potentially forcing U.S. exports to shut in, Citigroup said in its report. Gas at the Dutch Title Transfer Facility is now trading near $5.

“There’s too much gas in Asia, there’s too much gas in Europe and that means the U.S. may need to be the swing supplier,” Devin McDermott, an equities analyst and commodities strategist for Morgan Stanley in New York, said in a telephone interview.

--With assistance from Stephen Stapczynski.

To contact the reporters on this story: Naureen S. Malik in New York at;Anna Shiryaevskaya in London at

To contact the editors responsible for this story: Simon Casey at, Christine Buurma, Carlos Caminada

©2019 Bloomberg L.P.


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