As winter approaches in the northern hemisphere, spot rates for dual-fuel, diesel-electric (DFDE) LNG carriers have more than trebled since the summer, supported as much by technical factors as fundamentals, said a leading UK-based maritime and energy research consultancy
According to Saturated Gas, an LNG Market Report for Q3 2019 from Maritime Strategies International (MSI), spot rates for DFDE tonnage were reported as high as US$130,000/day in October 2019, up from around US$40,000/day in the summer.
This was similar to a surge at the same time last year created by high levels of floating storage, which removed ships from position lists in Asia and Europe. This year the primary factor has been non-market related; the spill-over into the LNG sector of US sanctions on parts of the COSCO empire, resulting in joint ventures between China LNG Shipping and companies including Canada’s Teekay and Japan’s MOL being rendered unable to trade.
A restructure of COSCO’s ownership led to the removal of sanctions in late October, but not before the disruption had spurred the surge in spot rates. At the same time, European LNG storage is said be to full, having remained at high levels throughout the year, to such an extent that vessels are now waiting to get into terminals to discharge cargoes.
“This highlights the unusual state of the market at present in the face of a global glut of gas,” said MSI director Stuart Nicoll. “The rise of US production this year and weak demand in Asia has driven volumes to Europe and kept gas prices low throughout the year, with NBP and Henry Hub way below 2018 levels,” said Mr Nicoll. “This could be a fundamental shift to sustained lower gas prices, but the full implications are not yet apparent. The key question is where the additional LNG will go.”
With Europe saturated with gas and Asian demand brittle, MSI suggests a rebalancing in the gas market may require a slowdown in US production to raise prices and restore margins. This would mean short-term pain for LNG carriers at the expense of long-term gain from US projects yet to be developed, added MSI LNG analyst David Bull.
“When, or even if, the Trade War is resolved, it is assumed there will be a significant uptick in vessel demand when US cargoes start to flow back to China again,” said Mr Bull. “While there will be almost no shipping on the route during 2019 and limited prospect of a near-term resolution, we still posit a resumption in trade between the two countries at some stage in 2020, although this is indicative and subject to revision.”
With the LNG carrier utilisation rate set to remain elevated over the next couple of years, the sector is poised for further periods of high spot and short-term charter rates, but MSI believes the industry is at an inflexion point, with decisions made now dictating the trajectory of LNG shipping for the first half of the next decade and beyond.