LNG Market Looks to Be in a Glut

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--The head of Bermuda-based FLEX LNG (NYSE:FLNG) struck a positive tone when announcing first-quarter earnings, while at the same time pointing to a contraction in global liquefied natural gas (LNG) trade as the market grows saturated.

FLEX LNG reported net income of $35.2 million for the three-month period ending in March, compared with $54.5 million during the fourth quarter. The company suggested that a program meant to optimize its balance sheet was to blame for the loss.

"As we completed the balance sheet optimization program during the first quarter, we had some additional financing costs in our accounts for the first quarter," said Chief Executive Officer Oystein Kalleklev.

The company said it refinanced its entire fleet of 13 vessels, however, which increased its cash balance by around $380 million, after fees and expenses.

Nevertheless, the company said the first quarter was typically a soft one, though it also pointed to an increase in the price of a newbuild vessel and increased interest rates over the period.

Global trade in LNG, meanwhile, is expected to slump by 5.2%, the company said.

Liquefied natural gas through much of 2022 was something of a market savior as economies of scale looked for alternatives to Russian natural gas. A market that was heavily saturated by sanctions imposed in response to the invasion of Ukraine, coupled with a supply-side deficit, led to an extraordinary increase in prices for natural gas.

Dutch TTF prices, a European benchmark for natural gas, topped $300 per million British thermal units (MMBtu) last year, as the bloc was squeezed by supply-side concerns and a geopolitical premium that supported prices even further.

TTF on Tuesday was trading in the low $30/MMBtu range.

For LNG, it's even cheaper. Industry sources told the Reuters news agency the LNG for delivery into just the Asian market hit $10.50/MMBtu, a 4.5% decline from week-ago levels and the lowest price since May 2021.

In the European market, meanwhile, Germany has pulled off two about-faces in relative short order. It was first able to scale-up its capacity to take in more LNG with the quick installation of three floating units, exploiting the rush of LNG coming from terminals on the U.S. Gulf Coast.

Government sources told Reuters in a separate report, however, that Germany was cutting its LNG ambitions in half as the market moves past sanctions-related issues.

FLEX LNG nevertheless sees the Atlantic Basin as the prime engine of growth, with European demand for LNG jumping about 12% relative to levels from first-quarter 2022. Regional storage levels, however, are well-ahead of the pace necessary to reach 90% capacity by November, a target set by the European Commission.

In the U.S. market, FLEX anticipates stable supplies now that Freeport LNG is back in service. Two more liquefaction terminals achieved a positive investment decision during the first quarter and even more are expected. Meanwhile, another 11 sale purchase agreements were inked during the first quarter, following a record-setting rush for LNG last year.

The United States is easily the world leader in LNG exports and trends support perceptions of a saturated market. The federal government is expecting a 14% increase in exports relative to year-ago levels and another 5% increase for 2024.

FLEX's Kalleklev was optimistic that the long-term horizon was supportive for his company given it has no open slots in its bookings until 2027. Longer time contracts are cause for optimism, but he may be swimming against the tide.

"Liquefaction projects targeting in-service after 2026 may be entering a much smaller demand pool than bullish market forecasts anticipate," research from The Institute for Energy Economics and Financial Analysis found. "As new supply floods the market, today's tight markets may give way to a supply glut, with lower-than-anticipated prices, smaller netbacks, tighter margins, and lower profits for LNG exporters."

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