The international trade in liquefied natural gas, or LNG, has collapsed, squeezing an important outlet for U.S. shale gas

By Ryan Dezember
July 7, 2020 5:30 am ET

Natural-gas prices have bounced back from the 25-year low reached late last month, but analysts and traders don’t expect them to go much higher—at least until it is time to turn on the heat.

As other assets recover from the coronavirus meltdown and even exceed prepandemic highs, natural gas has lagged behind. There is simply too much of it.

Stockpiles of the power-generation and heating fuel are bloated world-wide. The international trade in liquefied natural gas, or LNG, has collapsed, squeezing an important outlet for U.S. shale gas. And with crude prices back up to around $40 a barrel, oil producers are reopening the spigots and, as a byproduct, putting a lot of cheap gas into the market.

Natural-gas futures for August delivery ended Monday at $1.83 per million British thermal units. That is up 23% since June 25, when futures for July delivery closed at $1.482—their lowest level since August 1995. Yet it is still 24% below the price this time last year and 36% less than the price two years ago.

Investors have trimmed their bearish bets in recent weeks, reducing their net short position, or wagers that prices will fall, according to Commodity Futures Trading Commission data. But analysts caution against getting too bullish. They don’t expect prices to exceed $2 for any sustained period until Americans are turning on the heat in their homes.

The heights of summer and winter are when gas prices are typically at their highest, given the demand to power air conditioners and fuel furnaces. But the global gas glut and diminished demand thanks to the pandemic shutdowns have produced not only the lowest June prices ever in the U.S. but also the lowest price on record for any month in Europe.

The collapse in European prices has been especially problematic for U.S. producers. BofA Securities analysts describe Europe as the “dumping ground” for LNG. Buyers there are usually eager for shipments to augment local production and compete with Russian pipeline exports.

But the continent’s storage facilities, already pretty full following a mild winter, brimmed as cargoes were diverted from Asia. Supplies were robust in Asia when the pandemic slowed industrial activity in China at the start of the year, sending local prices crashing to all-time lows.

With tanks and storage caverns filling up around the world, LNG buyers canceled orders. More than 110 cargoes for export have been scrapped, according to the U.S. Energy Information Administration. The amount of gas delivered to U.S. shipping terminals has fallen by more than half since late March, when a record 9.8 billion cubic feet a day was piped to such facilities, it says.

Gas that would have been chilled to a liquid, put on a boat and sold overseas has been pumped into U.S. tanks and storage caverns instead. The price slide to the 25-year low last month followed an usually large build in U.S. stockpiles. Forecasts for steamy weather and an injection into storage last week that was less than analysts expected brought prices back.Goldman Sachs Group Inc. analysts estimate that canceled LNG exports will add 760 billion cubic feet to U.S. inventories, which are already 30% higher than a year ago and 18% above the five-year average. Inventories could exceed the country’s capacity to store gas in October, they said in a note to clients.

Goldman lowered its October price forecast to $1.40, from $1.75, and said that prices could drop to 90 cents at a key Pennsylvania trading hub. That is below cost for the Appalachian drillers that price their product there and would likely prompt big regional producers like EQT Corp. to choke back output and shut in even more wells than they have already.

“This is effectively the last shoe to drop in a global gas rebalancing process that started with Asia pricing its LNG lower to push excess cargoes towards Europe,” the analysts wrote.

Less Appalachian output and the resumption of industrial activity around the world could send gas prices shooting up around the time that Americans are dialing up their thermostats.

BofA’s analysts expect prices to average $1.75 this summer but bump up to $2.60 in the fourth quarter and $2.90 during the first three months of 2021. Goldman predicts $3.50 in December and the winter months of 2021.

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