American LNG is sailing away from Europe

U.S. spot LNG supplies are beginning to shift from Europe to Asia in January as declining gas prices in the EU make shipments less profitable. The trend could strengthen if the EU’s demand for gas to fill its storage facilities this winter turns out to be much less than expected. While the US has become the largest supplier of LNG to Europe in 2022, wild price fluctuations make it difficult to sign long-term contracts and slow down investment decisions on new projects.

Lower gas prices in Europe have led to a gradual reduction in US gas supplies to the continent as part of the spot cargo begins to be diverted to Asia. According to Platts, in the 20 days of January, about 64% of LNG exported from the US went to Europe, compared to 70% on average in the fourth quarter of 2022. At the same time, the share of shipments to Asia rose to 29% from 22% in the fourth quarter against the background of the gradual opening of the Chinese economy after the lockdowns. Now the United States exports about 8.6-8.8 billion cubic meters of gas per month in the form of LNG.

In January, gas prices in Europe fell by almost $600 per thousand cubic meters on the back of warm weather, high stocks in storage facilities and an increase in wind generation generation. As a result, spot LNG prices in Asia exceeded those in Europe by mid-January, which usually results in cargo spillovers. At the same time, the difference is not yet large enough to cause a massive outflow, given also the need to pay for the passage through the Panama Canal in case of export from the US to Asia, as well as the shortage of tankers in the Pacific basin.

In 2022, the United States became the largest supplier of LNG to Europe (38.9 million tons, according to Kpler), with most of the shipments being spot deliveries. Russia ranked second in terms of LNG supplies to the EU (taking into account the supplies attributable to the shares of Total and CNPC in Yamal LNG), ahead of Qatar.

Although gas prices in Europe began to recover slightly in the second half of January on the back of colder weather, there are currently no prospects for significant price increases in the coming months.

Moreover, there is an increasingly popular opinion among analysts that the continent may expect a significant reduction in prices in the summer if it turns out that the EU countries will come out of the winter with higher reserves in UGS than expected. As UGSs fill up, there could be an overhang of LNG in the European market, given that the downturn in consumption in Europe appears to be long-term and consumption in Asia could also be weak in the summer. A similar situation was observed in the pandemic year of 2020, when gas prices in the world fell significantly below $100 per thousand cubic meters. This does not negate the possibility of sharp price hikes closer to winter, when consumption could rise sharply in both Europe and Asia.

High volatility and an unclear price situation are forcing European consumers to be in no hurry to conclude long-term LNG contracts, despite the actual loss of Russian volumes. In 2022, the EU countries received less than 60 billion cubic meters of Russian gas, but European companies signed long-term contracts for only 9 million tons (12 billion cubic meters) of LNG from the United States. And this is despite the fact that Europe primarily relies on American LNG, and Germany has already commissioned three LNG receiving terminals with a total capacity of 14 billion cubic meters of gas per year over the past six weeks. “What is clear from the current wave of contracting is that European companies still prefer to buy LNG on the spot, as they do not want to enter into long-term contracts,” says Platts’ Ross Weino.

The low percentage of long-term contracts in Europe, as well as the unclear contracting situation in Asia, where the main consumer China is also in no hurry to conclude new agreements, may slow down a new wave of US LNG projects.

So, in 2022, despite a sharp increase in demand for American LNG, only two projects (Venture Global for 13.3 million tons and the third stage of Corpus Christi for 11.4 million tons) reached the stage of the final investment decision (FID). However, at least four more projects expect to adopt FID in 2023.

Yuri Barsukov