It’s shaping up to be a drastically different summer for U.S. liquefied natural gas (LNG) exporters as the global market has unexpectedly tightened and demand has spiked in a reversal of fortunes from last year when trade slumped to historic lows. 

“Things changed a lot,” said Rystad Energy’s Carlos Torres Diaz, head of gas and power markets. “This time last year, things were very gloomy and really for this year also. There were expectations that the recovery would be slow.”

This year was always likely to be a better one for commodities as the global economy continues to rebound from the worst of the Covid-19 pandemic. The International Energy Agency still expects year/year natural gas demand growth to be modest at 3.2%. But a brutal winter in the Northern Hemisphere caught the global gas market unaware, leaving storage inventories in Europe and Asia short and setting the stage for a strong injection season. 

“If you look at the forward curves for both the Title Transfer Facility and the Japan-Korea Marker (JKM), they’re practically flat with where they are now,” Torres Diaz told NGI. “That shows that the market is expecting quite a tighter market than was previously expected.”

In Europe, working storage inventories finished the heating season at about 1.1 Tcf on March 31, or 11% lower than the five-year average and 44% lower than record-high stocks at the same time last year, according to the Energy Information Administration. European inventories currently stand at 29% of capacity, or about 23% below the five-year average. 

Asia and Europe competed for LNG cargoes over the winter and storage stocks in the Far East were also depleted, which has driven stronger-than-expected restocking demand there as well. 

An unseasonably cold spring in Europe, coupled with higher carbon prices that have incentivized the use of natural gas on the continent have propped up prices and strengthened JKM as the regions compete for supplies. European prices are trading around $7.45/MMBtu through September, while JKM is at a premium of more than $8.50 over the same time. 

The market has proved a boon for U.S. exports. Feed gas deliveries to supply the terminals have run at over 11 Bcf/d throughout April, continuing a stretch of record highs set in March.

Over the last two weeks, nearly 40% of U.S. LNG exports have headed for Asia to take advantage of the arbitrage spread, according to Reid I’Anson, an economist at market research firm Kpler. Many vessels have also opted to take the longer route around the Cape of Good Hope to avoid delays at the Panama Canal, the primary passageway to North Asia. I’Anson also said that four vessels have diverted toward Asia from destinations in the Atlantic Basin since April 19 to capture price premiums. 

While cooling demand could help this summer, Asia’s strong LNG buying is expected to ease soon as stocks are filling. A major Covid-19 outbreak in India, which is a leading spot LNG buyer, could also hinder demand in the region, demonstrating that the virus remains a wildcard for global energy consumption.

“In Asia, given that they don’t have so much underground storage capacity, restocking is quite limited, so they should probably be getting closer to normal levels,” Torres Diaz said. “I don’t expect that Asia will continue to be buying huge volumes of LNG throughout the summer compared to Europe.”

Christin Redmond, a commodity analyst at the French multinational energy company Schneider Electric, agreed, saying that when Asian demand normalizes, Europe will become the “global sponge” for the rest of the LNG market this summer. 

“Outside of any kind of extreme weather events like hurricanes or planned maintenance, my expectation is that U.S. exporters will run at full capacity,” Redmond told NGI. 

That’s a far cry from 2020. Last year at this time, the first wave of U.S. cargo cancellations were becoming evident as global gas prices sank amid a supply glut and demand destruction caused by the pandemic. European prices last April were below $2.00, while JKM hovered just above that point.

Ultimately, it’s estimated that up to 200 cargoes were cancelled through the fall. U.S. feed gas demand last summer hit a low point of about 3 Bcf/d during the downturn.

James Waddell, head of European Gas at Energy Aspects, said the situation is likely to be very different this year. Europe, he told NGI, is relying on “heavy LNG flows” for its summer stockbuild. He noted too that European pipeline imports, particularly those from Russia, have been weak and are not challenging the super-chilled fuel across the continent. 

But even if U.S. export terminals run at full capacity this summer, don’t expect a bump in U.S. prices. For now, the U.S. supply and demand outlook is balanced, with increasing production seen offsetting strong exports. U.S. gas output hit an 11-month high in March at 91.4 Bcf/d, according to analysts at BofA Global Research. They have lowered their projections for Henry Hub to an average of $2.75 through the remainder of the year. 

Associated gas growth is likely to lift production volumes. 

“A lot of those oil producers are still hesitant to have a lot of spending,” Redmond said. “There’s still a lot of focus on improving balance sheets, but with oil prices hovering where they’ve been for the past month or two, I think it would be hard for a lot of them to pass up on that kind of an opportunity.”

Lower Henry Hub prices — to which many U.S. LNG supply contracts are linked — improve the margins for offtakers. According to NGI data, the maximum Gulf Coast LNG netback for June stood at $6.993 on Thursday, or $4.162 above where Henry Hub settled. NGI projects similar netbacks throughout the summer months.