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IHS Markit analysis of the US LNG market

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A turndown in US liquefaction capacity has begun amid oversupplied markets and low prices as result of the COVID-19 pandemic. Deliveries of feed gas to US liquefaction plants have fallen from 9.5 billion ft3/d as of late March to 6 billion ft3/d as of mid-May, according to IHS Markit.

Until recently, US LNG facilities have been operating at full utilisation.

“The inevitable has happened. US LNG capacity utilisation has begun a turndown in response to market forces exacerbated by COVID-19. We are witnessing an historic event where US LNG is taking on the new role of swing supplier,” said Terrell Benke, Executive Director, IHS Markit.

The latest IHS Markit assessment implies aggregate US capacity utilisation has fallen to 65%, with further declines coming.

IHS Markit expects utilisation at times will fall below 50% given summer price differentials which put US LNG firmly out of the money on a short-run marginal cost basis.

“The outlook for US LNG exports this summer is bearish. Current forward prices indicate that US LNG is out of the money through at least September. Additional cargo cancellations will follow. It all adds up to continued pressure and a new source of supply flexibility in the global gas market,” said Matthew Shruhan, Senior Analyst, IHS Markit.

The process by which this turndown in US LNG output will balance the global market will not be smooth, and the scale of LNG cargo cancellations from the US and other suppliers globally is expected to provoke greater price volatility as the market attempts to balance supply and demand.

US utilisation is also likely to oscillate as it tries to achieve a delicate market balance. There is potential for cargo cancellations to overshoot, putting upward pressure on spot LNG prices and potentially putting US LNG back in the money at certain times.

The timing and duration of price signals will be critical in the coming months given the lead time required for cargo cancellations.

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