LNG Market Outlook


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Toby Dunipace

Head of SSY Gas

The LNG shipping market felt the negative ramifications of Covid for the majority of 2020. This resulted in the global destruction of demand for LNG, which is effectively driven by air conditioning and heating demand. Much of this stemmed from the major buying nations of LNG; China, Japan, Korea, Taiwan, and buying countries in Europe. Unlike the conventional tanker shipping markets, where floating storage is a more prevalent tool for charterers, LNG’s cargo boils off each day, resulting in a lack of long-term storage solutions. Without the ability to store cargo for a long time, the need for shipping to act as a back stop for high storage meant that LNG shipping rates fell to extremely low levels.

 

This negative market continued until Q4 2020, when the shipping market saw a huge uplift on the back of rising demand and commodity prices that went above $10/Mmbtu in the Far East. The demand stemmed from cold weather and also production shortages in the Far East, that resulted in cargoes being pulled from the Atlantic Basin causing longer tonne miles and a tighter market. $150,000 / day for modern LNG carriers was beaten and overall it was a very strong finish to the year. It is important to look at the year before when projecting 2021. On the face of it, 2021 is likely to start off well in January and hopefully February. The commodity pricing continues to rise as the demand for LNG continues. Cold weather, especially in China, is the key driver and this is being heightened by ongoing Panama Canal delays. The Panama Canal is experiencing significant congestion during the busiest part of the year, and this is leading to waiting periods for LNG carriers of 7-10 days or more. This bottleneck for shipping has an immediate impact on the demand for Gas, storage supplies are low and therefore, demand is high.

If we see a cold February and March, then the shipping market could see an overall positive Q1. The market will more than likely slide during March at the latest, when there is a significant amount of LNG new buildings that are delivering at the back end of Q1. Added to that we will see the commencement of the ‘shoulder months,’ where there is lower trading in the interim period between winter and summer. These two points coupled together will see a poor shipping market. New buildings will continue to deliver throughout Q2 and Q3, and ships also come off time charter during this period. Overall the market projections are very bearish for Q2 and Q3 2021. End Q3 and Q4 are historically periods to get excited about, and there is every chance that we could experience similar numbers to those in 2020. There is no fundamental reason to explain this view, but the volatility of shipping and LNG shipping especially (where market availability can vanish quickly) always leaves charterers looking to secure term tonnage at lower levels to avoid exposure to the spot market and any possible spike. Another reason to look at 2020 is that even during the worst global pandemic since the Spanish Flu, with demand for energy at record lows, we still saw a very buoyant market with strong volatility. Even with a depressed outlook for 2021, there is always the chance for a volatility spike.

The hot topic away from the short-term LNG market will be LNG Bunkering. IMO 2020 has resulted in the need for shipping to adapt and meet emissions regulations. LNG is probably the most viable solution for the next 10-15 years in terms of the shipping market moving towards a greener way to transport commodities. There is a ready supply of the fuel/cargo and it is much less harmful to the environment than standard marine bunkers. As ship owners embrace the tougher regulations, we should see a move towards dual fuel ships – whereby a combination of low sulphur marine bunkers and LNG are used. This will result in the need for LNG bunker supply ships – transporting and containing LNG is not as simple as oil products, and in itself is a growing market. The flip side to this is that there will be tougher regulations imposed on the maritime sector, and investment in cleaner methods of transportation may take some investment away from LNG. This is a small risk in the near term. However as previously mentioned, the supply of gas is so large, it will be challenging to walk away from its abundance.

You can read our full Outlook for 2021 here.

 

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