In the past two years, Europe’s LNG imports have soared, absorbing global supply growth, particularly from the US. In April of 2020, Europe accounted for 42% of US LNG exports. However, European imports haven’t been solely to meet demand growth or displace historical supply sources. European gas storage inventories have been steadily climbing since early 2019 and now storage constraints are hampering US LNG send out. US LNG exports have declined from over 7 Bcf/d in early 2020 to only 4 Bcf/d so far in June. Today’s Energy Market Insight will review the outlook for European natural gas storage and potential impacts to US LNG exports.
As of May 31, European storage was 1.2 Tcf above the 5-year average. If European gas storage were to fill from May 31 levels at the same daily rate as 2019 daily net injections, storage would be set to hit estimated capacity of 3.78 Tcf on August 15. However, in May, average daily net injections were 1.1 Bcf/d lower than the prior year average. If storage were to continue at this lower level and fill at 1.1 Bcf/d lower every day than 2019 daily net injections, storage would be set to hit capacity on August 23. Even though European storage appears to be filling slower than it did in 2019, continuing this lower injection rate would make only a very small difference in when European storage would be full.
The slowdown in European net injections is largely driven by declines in US LNG exports. Declines in LNG exports in April began to impact May European storage refill rates, meaning the most recent sharp drops in US LNG likely have not yet appeared in storage inventories overseas. Deliveries to US LNG export facilities have fallen an additional 3.8 Bcf/d since April, from 7.9 Bcf/d to 4.1 Bcf/d to date in June. While the impacts of COVID-19 on global demand are the main cause of this decline, there are also tropical storms set to hit the US Gulf Coast soon. Severe weather can cause serious damage to infrastructure and disrupt shipping routes through the gulf. As a result, export facilities often reduce volumes in anticipation of tropical storms to prevent running out of LNG storage capacity if ships are materially delayed from loading.
While deliveries to US LNG export facilities and actual export volumes are not exactly one-to-one, for this exercise, we will assume that a 3.8 Bcf/d decline in deliveries equates to a 3.8 Bcf/d decline in exports. Removing 3.8 Bcf/d of US LNG from the global market could materially reduce how much gas is injected into European storage. If daily net injections continue to be 1.1 Bcf/d lower than 2019 rates, and there is a 3.8 Bcf/d decline in LNG imports, European gas inventories should not hit capacity this year, all else equal.
A sustained 3.8 Bcf/d decline in US LNG exports could save European gas storage from a precarious fate this summer but calls into question the viability of US exports if European demand does not rebound strongly over the winter which would reduce the severe storage overhang in Europe. A second warm winter combined with lingering COVID-19 impacts to demand could prove to be challenging for US exports to ramp up to capacity in 2021. To stay up to date on BTU’s views on domestic and international gas demand, request a sample of our Henry Hub Outlook.