U.S. LNG profitability window temporary closed

The window of profitability for spot U.S. LNG cargoes has nearly shut, at least temporarily, due to rising costs of gas in the U.S. and falling prices for LNG around the world. The narrowing of profit margins could be a temporary blip, or it could be a harbinger of a gloomier financial backdrop for LNG exporters in the coming years as a wave of supply washes over the market.

U.S. LNG exporters have made mountains of cash by exporting cheap gas to higher priced markets around the world, particularly in Europe and Asia. That gap in pricing, or spread, reached a high water mark in the 2022 and 2023 after the war in Ukraine.

But times are changing. The Henry Hub to TTF spread has dropped to a four-year low, squeezing the margins for exporting American gas.

The cost of LNG arriving in northwest Europe — the TTF price — has declined dramatically this year due to mild weather, ample LNG deliveries, and less geopolitical volatility. TTF prices have fallen below $10/MMBtu.

At the same time, U.S. natural gas prices have gone in the opposite direction, soaring in recent months on the back of colder weather and a steady increase in gas heading overseas in the form of LNG. Henry Hub prices briefly hit a three-year high in early December, close to $5.50/MMBtu, although prices slid back below $5 a few days later.

That shrinking difference between U.S. and European gas prices has squeezed exporters.

“Henry Hub is at $5. Liquefication fee — $2 let’s say. You add $1 for freight. Another 35-50 cents for regas depending on where you land,” Sergio Chapa, a Houston-based LNG analyst at brokerage firm Poten & Partners, said on a webinar. “You are looking at more than $9 per MMBtu for U.S. natural gas to go to places like Europe and Asia, at a time when TTF prices are $10? JKM below $11? Wow.”

“You’re seeing an erosion of those margins right now,” he said. “Some people could be under water.”

“It’s a tough way to make a living,” Jason Feer, head of business intelligence at Poten & Partners, said in response.

Other analysts are also eyeing the sudden shift in fortunes for U.S. LNG, which rode a wave of momentum and gave final investment decisions to a record number of projects this year on the assumption that market strength would continue indefinitely.

“[T]he TTF-Henry spread collapsed to just near $4/mmbtu, while TTF prices fell below the long-run marginal costs of US LNG,” Greg Molnár, a gas analyst at the International Energy Agency, wrote in a LinkedIn post. He added that while the collapse of the price differential was temporary, the “spread is expected to tighten in a structural manner” in the medium-term.

A tidal wave of new U.S. LNG capacity is expected to come online later this decade, ramping up exports at a pace that will significantly outstrip demand growth.

Energy analyst Seb Kennedy, founder of the newsletter Energy Flux, described this trend as the U.S. LNG industry “eating itself.”  The enormous expansion of export capacity has led to “profit cannibalisation” he wrote.

“And with 2025 shaping up to be a record-breaking year for LNG project final investment decisions (FIDs), this is just the start of glut-era gas economics.”

Cancelled cargoes, production pressure

While many analysts had seen the supply onslaught coming, the sudden spike in U.S. natural gas prices piles on additional problems for LNG exporters.

The U.S. produces around 107 billion cubic feet per day (bcf/d) of gas. Currently, 18 to 19 bcf/d is exported in the form of LNG, Chapa said, roughly equivalent to 15-20 percent of total production.

That portion is set to grow. ExxonMobil and QatarEnergy’s Golden Pass LNG terminal near Port Arthur, Texas will add another 2.4 bcf/d of additional demand over the next 18 months. “So natural gas prices are rising,” Chapa said.

“Normally the cure for high prices is high prices, and you would see more drilling rigs coming, more production,” he said. “It just hasn’t shown up yet. It’s coming, we are told.”

The doubling of U.S. LNG export capacity over the next few years will require another 24 bcf/d of natural gas supply just to feed the terminals. “Over the next five years or so, we are going to need to add more production,” Chapa noted.

That could prove to be challenging, and likely means there will be no return to cheap gas of the recent past. Bringing more supply online will require higher prices.

“[W]ith the inventory of previously drilled wells largely utilized by producers over the course of this year, it would take higher drilling in 2026 in order to further raise US gas production to manage inventory levels in face of a continued rise in US LNG exports,” Goldman Sachs analyst Samantha Dart wrote in a December 7^th note to clients.

But Henry Hub futures for the late 2020s are currently trading around $3.30-$3.70/MMBtu. That “doesn’t even cover the marginal cost for non-core Haynesville, let alone the likely higher cost associated with the next, most economic source of dry gas growth, like Oklahoma or Eagle Ford, once inventories limit further growth from the region,” Dart wrote.

That puts long-term prices in the $4.00-$4.50/MMBtu range, she forecasted, but with potential for higher. “We see upside risk coming from Haynesville inventory exhaustion requiring increased investment in more expensive producing areas, which could, at least temporarily lift Henry Hub prices above our forecast to incentivize such investment.”

Structurally higher U.S. natural gas prices aren’t just a problem for LNG exporters, but also for the buyers of that gas, whether they are end-users or the middlemen. These traders, or portfolio players, have taken on the risk of locking in U.S. natural gas under long-term contracts on the assumption they could flip cargoes at a higher price somewhere else.

“Asia-Pac buyers have signed a lot of long-term U.S. contracts, and the whole ‘three-dollar-forever’ story that a lot of them were sold on, it seems like that is a story that may not have a happy ending for some of them,” Feer said on the Poten webinar.

“This is definitely a growing concern among Asia-Pacific buyers,” Irwin Yeo, Poten’s senior LNG analyst in Asia, responded.

In Europe, the ban of Russian gas and LNG was expected to result in a surge of long-term contracting from European buyers for U.S. LNG, said Steven Swindells, a London-based senior LNG analyst at Poten.

But that isn’t likely to happen in the face of the sharp rise in U.S. Henry Hub prices and the fall in Europe’s TTF marker, which “incentivizes companies to rely on spot or really short-term volumes,” he said.

Now, the talk is about whether or not U.S. LNG terminals will need to cancel cargoes when the glut hits the market with full force, perhaps in 2027 when a lot of new U.S. projects come online, or a bit later in 2028-2030 when those projects are all fully operational.

“Post 2027, we reiterate our view that continued growth in global LNG supply will likely lead NW European storage towards congestion in 2028/2029, pressuring TTF and JKM prices low enough to reduce global LNG supply by closing the US LNG export arb,” Dart wrote. “The resulting cancellation of US exports will in turn soften the US gas market and likely pressure Henry Hub sharply lower.”

Dart envisioned a scenario that sees the cancellation of U.S. LNG shipments for a period of four months in both 2028 and 2029 — cutbacks that would be necessary to rebalance the global LNG market.

Feer echoed that sentiment, predicting around 100 LNG cargoes from the U.S would be cancelled in 2029-2030, due to the “saturation of the market” and the “relentless march of new supply coming online.”

Many in the LNG industry assume that surplus U.S. LNG supply will eventually be taken up by Asia, particularly China, which is often viewed as a source of bottomless demand.

But China has surprised the market with LNG imports sharply down this year. There is disagreement among analysts about future Chinese demand, but strong growth is no longer a safe bet.

“There is a tendency sometimes for people to overestimate Asia’s ability to soak up the LNG surplus. I think significantly, China is pulling back,” Yeo said. “The issues the Chinese economy is facing doesn’t seem to be short-term. I’m not sure how much of an appetite China has for LNG right now, for the next five years, or even long-term.”

China may not come to the rescue for U.S. LNG exporters with too much capacity on their hands, he said. 

“I’m doubtful for China as an outlet for these volumes.”

(Writing by Nick Cunningham; editing by Sophie Davies)