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LNG shipping market shaping up for a wild ride

Photo: Hoegh LNG neptunehoeghlng.jpg
The 2021 marketplace for LNG trade, followed closely by Poten & Partner’s Houston-based consulting team, was characterised in a webinar this week as “Shaping up to be another wild ride”.

Poten’s LNG activities, and the thrust of the seminar, go deeper into cargo supply chains than cargo fixtures and freight market analysis.  Nevertheless, the session offered considerable insights into LNG charter market dynamics - how we got here with daily TC hires for standard 174,000 cu m modern LNGs said in market chatter to have reached  above $250,000 per day on US Gulf - Japan and $320,000 per day on US to Europe liftings, and the possible implications for the charter market during 2021.

At the highest level, seasonality is the biggest driver of LNG hire rates with the 2021 outlook of potential strength during the summer months in stark contrast to 2020’s Covid-enhanced summer slump.

As explained by Kristen Holmquist, Poten’s business intelligence forecasting manager: “We really think what is going on now is seasonal.  Last winter [2019-2020], US production pretty much went to Europe…though this year, it’s going to Asia…so there’s just a huge increase in ton mile demand, even going through the Panama Canal.”

She added: “As Asian demand cools down, as we start to change seasons… the ton-mile demand will go down.” She then ruminated on whether we will see this pattern next year, suggesting that: “This could signal that we have a stronger seasonal trend in shipping.”

The dynamics of cold weather in Asia, reduced LNG production in mid 2020, and this winter’s record-setting seasonal drawdowns of European gas in storage, are complicated.  Poten painted a picture of 2021 LNG production up substantially from the highs of 2020, set in Q1, with the Jan 2021 monthly export anticipated to be above 3.5m tons (compared to 2020’s 3.3m tons) with nearly all of these incremental molecules coming from the US.  

Extremely high prices in Asia, with the “JKM” indicator reflecting “prompt” deals at prices above $30 per mmBTU, and strong forward pricing curves, are pulling gas cargoes into Asia,more than covering the extraordinarily elevated hires into Q2, rather than Europe.  Holmquist noted that forward prices were high in Europe, “but not high enough to beat out what’s going on in Asia”. Overall, she said, “the message is that the forward curve will stay strong all year.”

Come springtime, dynamics will shift- with main factor to watch in 2020’s Q2 and Q3 being the profile of European imports to rebuild storage;  webinar viewers saw slides titled “European storage to determine shape of summer market”, followed by “US export curve dependent on European storage build.” Potentially, the storage build could make room for 120 LNG cargoes. 

US exports were estimated to rise from 2020’s 48m tons up to nearly 60m tons. Interestingly, Chinese imports of LNG are not expected to grow significantly, with Poten noting that increased pipeline gas imports (especially from the Power of Siberia pipeline, launched in late 2019) would reduce incremental levels of LNG coming into China.

The outlooks of shipping shares analysts comport with the Poten view. Jefferies & Company analyst Randy Giveans told investors earlier this week: “For LNG, we expect rate strength during 1Q21 before seasonal softness this spring/summer; that said, we expect a vast improvement in 2021 compared to 2020.”

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