A Wednesday fire knocked one of the largest U.S. liquefied natural-gas export plants out of service for at least three weeks, pressuring LNG markets already battling a supply crunch. The outage forced a divergence in U.S. and European LNG prices, with Europe’s energy markets already tightly constrained due to the international response to the war in Ukraine.
After hitting a 14-year high on Monday, natural gas futures prices sank 6.4% to 8.69 metric million British thermal units on Wednesday. U.S. LNG prices also dropped, as the incident at the privately held Freeport LNG export terminal in Quintana, Texas, left a large share of would-be U.S. LNG exports backed up with nowhere to go.
LNG-related stocks traded generally lower early Thursday. Meanwhile, European gas prices soared. Rising benchmark futures in Amsterdam snapped a six-day decline, according to Bloomberg. U.K. gas prices spiked 39%.
A One-Million-Ton Loss
Demand for LNG has soared over the past year, just as a slug of new capacity lifts the U.S. to compete with Australia and Qatar for the title of the world’s largest LNG exporter. On the demand side, even before Russia’s invasion of Ukraine, European electricity prices had skyrocketed late last year. With natural gas supplies from Russia now largely off the table in Europe, electricity prices are expected to go even higher. In 2021, Russia provided nearly half the European Union’s gas imports.
The Freeport LNG plant can produce around 2 billion cubic feet per day (bcf/d) of LNG. That provides more than 15% of U.S. LNG export capacity. U.S. LNG total peak export capacity in 2021 was about 12.98 bcf/d, according to the U.S. Energy Information Administration (EIA). The United States is the world’s top natural gas producer.
Before Wednesday’s explosion and fire, export trackers were reporting that the terminal was producing around its top level limit. Tom Marzec-Manser, a gas analyst for ICIS, tweeted Thursday that 68% of all Freeport LNG exports in the last three months have gone to the European Union and the United Kingdom.
“If the plant is only offline for 3 weeks, that’s almost 1 (million tons) of production gone from the Atlantic,” he wrote.
So far in 2022, 75% of total U.S. LNG cargos have gone to Europe, compared with 34% in 2021, according to federal data.
The U.S. Energy Information Administration announced Thursday that last week’s working natural gas storage was an estimated 1,999 bcf. This is a net increase of 97 bcf from the previous week. However, U.S. natural gas storage is down 16.6% compared to last year and 14.5% below the five-year average of 2,339 bcf, according to the federal estimates.
LNG Stocks To Watch
LNG exporter Cheniere Energy (LNG) reversed early losses and rose 0.6% before falling again. Rising prices in Europe following the Freeport LNG fire could potentially provide Cheniere a short-term boost.
LNG transporters Golar LNG (GLNG) and Flex LNG (FLNG) were down early in today’s stock market trading. The loss of export capacity suggests that, until Freeport LNG’s output is back online, there will be less LNG to move out of the U.S.
On May 4, Houston-based Cheniere Energy, an IBD Leaderboard stock, raised full-year 2022 EBITDA and cash flow guidance, after crushing Q1 revenue views. LNG cited increased volumes and higher LNG margins in part.
The relative strength line for both GLNG stock and Cheniere Energy bolted to multiyear highs in March after the Ukraine war. Flex LNG aced a record high and Golar touched a multiyear high early in June.
Both stocks have pulled back sharply following breakouts, falling more than 8% below their buy points and triggering the automatic sell rule.
Oil and gas stocks have steadily outperformed this year’s stock market. Industry giants Exxon Mobil (XOM), Chevron (CVX) and Shell (SHEL) — all significant players in the LNG field — can be found on IBD’s proprietary watchlists, including the IBD 50 and the IBD Big Cap 20. All three stocks moved lower early Thursday.
Please follow Kit Norton on Twitter @KitNorton for more coverage.
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