Exceptionally weak demand for liquefied natural gas (LNG), coupled with a surge in U.S. exports, led to an unprecedented bottleneck in global shipping flows in late October, according to S&P Global Platts.
LNG vessels that have not discharged their cargo 30 or more days after loading are generally viewed as “effective floating storage.” S&P Global Platts data shows that natural-gas volumes exported from the U.S. meeting this definition hit a peak of 1.54 billion cubic meters (54.5 billion cubic feet) aboard 15 vessels as of Oct. 28.
This was more than four times the effective floating storage involving U.S. cargoes seen at this time in prior years. Overall, about 60% of the stranded volume came from the U.S., with Qatar being the second-largest source. Floating volumes have since dropped sharply as cargoes unloaded earlier this month.
The massive liquid cargo logjam — which spawned a flotilla of fully laden vessels hunting for somewhere to unload — is a bearish sign for LNG demand, said Josh Zwass, managing director of LNG Analytics at S&P Global Platts, in an interview with FreightWaves.
For LNG shipping demand, it’s more of a mixed bag. On one hand, slow steaming and floating storage are positives for spot rates because they remove ships from the market. On the other hand, weak global demand for LNG is a bad omen for future shipping demand.
Changes versus 2018
According to Clarksons Platou Securities, spot rates for tri-fuel diesel-engine LNG carriers were $108,000 per day on Friday, Nov. 15, down 17% month-on-month. As floating storage rose through October, so did spot rates; rates have since followed the storage volumes down.
There have been two major changes since last year’s shipping rate peak in November, when LNG rates neared $200,000 per day.
“First, the U.S. [export market] was a lot smaller. The U.S. has become such a big component of global LNG,” Zwass explained.
“The second thing is that 2018 was a high-price environment [for the LNG commodity]. There were a lot of ships fast steaming. People were trying to find as much capacity as they could and reload cargoes and move them as far across the world as they could.”
In 2019, LNG commodity prices are very low. “In this sort of scenario, demand is so bearish that you’re wasting time [en route] on purpose,” he said.
Three reasons for floating storage glut
Three factors could have contributed to last month’s historic backup in the LNG supply chain.
First, shippers could have been using the flexible-destination nature of U.S. LNG cargoes for trading strategies in coordination with hedging. “If the price next month is a lot higher than this month, you just slow steam and wait. Someone might take a U.S. cargo, hedge it in Europe, and if they find a better buyer in Asia, unwind the hedge in Europe and move it to Asia, or if not, go with their hedge and deliver it in Europe,” Zwass said.
Second, there may be cases of effective floating storage because the original holder of U.S. liquefaction capacity is belatedly taking delivery after being unable to find a better deal elsewhere.
According to Madeline Jowdy, senior director of global gas and LNG at S&P Global Platts, “U.S. cargoes can go anywhere. They’re very flexibly traded, but South Korea, Gas Natural Fenosa [in Spain] and India’s GAIL — if you look at where these cargoes ended up, these are the biggest liquefaction capacity holders from Sabine Pass [an export terminal on the U.S. Gulf Coast].
“So, the fact that these cargoes went to these destinations as opposed to anywhere else kind of shows that there might not be a whole lot of other more attractive outlets in terms of price,” Jowdy told FreightWaves.
“There could also be a third reason for floating storage,” Zwass explained. “There could be cases where [on-land storage] capacity is constrained and demand is low, and the ship literally can’t discharge because there is too much LNG already there, so the ship is forced to float and wait.”
More to come?
S&P Global Platts data shows that more floating storage may be building up by year-end, although economic factors imply it would not be on the scale seen in October. The amount of laden LNG ships in the 15- to 30-day range (since loading) is increasing yet again.
It’s certainly possible that the pattern seen this year could be repeated a year from now during the peak pre-winter shipping season. U.S. exports are expected to be dramatically higher in 2020 due to new liquefaction trains coming online — the U.S. Energy Information Administration predicts the country’s LNG exports will surge by 27% next year. This will push more destination-flexible cargoes out into the seaborne market.
At the same time, the trading landscape wherein players seek to profit from cargo-destination optionality in conjunction with hedging “is still very young,” Zwass noted. That playing field could “increase in the future,” he said.
Finally, numerous market prognosticators have pointed to an oversupply of LNG that could last through at least 2020. This could fuel future floating LNG storage simply because there’s no place left to put the cargo. “A vessel is expensive but available [storage] capacity,” said Zwass, who emphasized, “The global gas market is oversupplied and there’s a struggle to consume it.”
All of which could create an ongoing interplay of headwinds and tailwinds for LNG shipping, as floating storage soaks up capacity (good for rates) and shippers find they have less need to move the cargoes in the first place (bad for rates). More FreightWaves/American Shipper articles by Greg Miller