Despite a 5% decline in overall European gas demand in 2020, we still expect LNG imports to Europe to grow nearly 7% year on year to reach 90 million metric tons. Most of this growth will result from the 23% growth in the first four months of 2020, import volumes through the rest of the year will remain at similar levels with 2019. At first glance, this resilience seems counterintuitive, but it reflects Europe's role as the LNG market of last resort.

European forward prices for June delivery have declined to $1.8/MMBtu at the time of publication. At this price level, US LNG currently appears to be out of the money throughout this summer and into September. Many US cargoes are unlikely to be delivered to Europe in summer 2020 from June onward. Indeed, at least 16 US LNG off-takers have canceled or suspended more than 20 cargoes for loading in late May and in June from Corpus Christi, Freeport, and Sabine Pass LNG. Many non-US LNG suppliers can live with this level of pricing in Europe, for a short time at least. Deliveries from Qatar and other (non-US) Atlantic Basin LNG supply sources are expected to increase during this period, as buyers in other parts of the world reduce their LNG imports.

Although Russian pipeline gas remains the lowest variable cost supply option into Europe—at approximately $1.5/MMBtu, it will absorb a significant portion of the 2020 European supply reduction. In the first four months of 2020, Russian pipeline exports declined owing to the reduction in pipeline nominations from contract holders, a function of both low demand and low spot prices. Critically, this reduction in flows occurred as an immediate way for the European market to manage reductions in supply amid sustained LNG inflows so far this year, before price signals suggested that US LNG imports would be uneconomic. Russia is marketing more incremental volumes on the Electronic Sales Platform than in 2019 as well as directly to hubs, but so far volumes have not been large enough to offset the lower nomination volumes.

IHS Markit does not expect prices in Europe to fall below the Russian pipeline variable supply cost on a sustained basis during summer 2020. However, the risk of sharp downward price movements will increase markedly into the third quarter of the year as seasonal demand falls and full storage inventories do not provide their usual buffer. Nominations of Russian gas will continue to be low, and we do not expect flows to pick up materially unless there is a marked recovery in demand in the final quarter of the year.

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IHS Markit experts are available for consultation on the industries and subjects they specialize in. Meetings are virtual and can be tailored to focus on your areas of inquiry. Book in a consultation with Alun Davies and/or Shankari Srinivasan.

Alun Davies is a Senior Director covering European gas market analysis.
Matthew Shruhan is a Senior Research Analyst covering global LNG market analysis.
Shankari Srinivasan is a Vice President leading IHS Markit's global gas analysis.

Posted 22 May 2020

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.