Europe’s role as incremental LNG supplier about to change

NYC-based PIRA Energy Group believes that Europe’s role as incremental supplier of LNG to the global gas market by reloading or diverting cargos to Asia, South America, and even the Mideast is about to change.

Europe has spent the better part of the last two years as an incremental supplier of LNG to the global gas market by reloading or diverting cargos to Asia, South America, and even the Mideast.

In the US, last week’s withdrawal came in below consensus estimates. The reported change once again confirmed bearish fundamentals with weather-adjusted balances over the past four weeks showing a ~4 BCF/D looser year-on-year market. This bearish reality appeared to sap the life out of the day prior’s weather-induced rally, with the prompt contract falling to the low $2.70s in the minutes after the report’s release and settling at $2.71/MMBtu.

Picking up on Monday’s note on the significance of Dutch gas production, PIRA focused on seasonal production in the months to come to show what the hyperbole is and what is grounded in reality. The bottom line is that the production losses in the first half of the year versus normal will be larger than the second half of the year. The prompt surge to 55p/th (€25/MWh) in a market where temperatures are above normal seems to be more of a short squeeze than a sustained fundamental threat, but the fact is that the market will be losing around 115-mmcm/d of gas production through June 30 compared to what was originally planned.

The Dutch government’s decision to restrict Groningen output comes amid concerns about increased seismic activity in the region. From a broader commercial perspective, this limit placed on production is of minimal significance on a sustained basis for European spot prices. The volume lost to the market is not necessarily needed in a current warmer-than-normal weather environment, where storage operators are already trying to unload gas to refill at lower prices during the upcoming injection season. However, it is not a coincidence that the government decided to make this announcement during what is typically the coldest week of the year in Europe.

While new eastern Canadian LNG projects continue to be revealed, PIRA Reference Case outlook of lower oil prices and insufficient cost-effective supply for the region remain likely to delay indefinitely all proposed eastern Canadian LNG export terminals.

Current month U.S. gas exports to Mexico have moved decidedly above any previous winter’s highs as volumes on NET Mexico ramp up. In addition, recently announced budget cuts and the related realignment of spending plans due to lower oil prices imply decidedly greater downside risks to domestic gas production than before. This, in turn, suggests an even faster acceleration of the country’s reliance on U.S. exports – beyond the near term.