Record High LNG Prices to Impact Oil Tanker Trade

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By Sarah Lovie, SSY Tanker Analyst

Global LNG prices have risen to a seasonal record high in September. The worldwide natural gas price rally has been driven by i) well below seasonal average European stock levels, with reduced piped gas inflows into Europe due to maintenance season in Norway and low flows from Russia/Ukraine, ii) strong demand in Asia (primarily China and South Korea), driven by economic recovery and high summer temperatures, iii) robust Latin American demand amid a severe drought, iv) record European carbon credit prices and v) production issues in several countries. Demand is also now rising globally in preparation for the northern hemisphere winter.

The high prices are prompting some users to switch to alternative fuels such as coal, fuel oil and diesel, which may lift oil demand and thus tanker trade. OECD oil stocks have drawn down this year, thus a significant call for more oil for power generation (especially if there is a colder-than-average winter) could tighten the oil market, potentially prompting the OPEC+ producer group to react and raise output more than planned, which in turn could increase cargo volumes. News reports suggest the Japanese oil industry is considering restarting oil-fired power plants as a cheaper way of meeting winter demand. Some Asian and Middle East countries are already switching to burning more fuel oil, lifting their imports, with this rise in demand (for fuel oil and middle distillates) contributing to Fujairah product stocks falling to a record low in 2H September, reported newswires.

However, the higher gas price could affect naphtha trade flows from Europe to Asia. Mediterranean refineries are reported to be making the switch from burning gas to using propane, butane and naphtha, while some are considering cuts at units that require a high intake of gas. LPG prices typically rise heading into winter, prompting a shift towards more naphtha use as a cracker feedstock, supporting clean trade to Asia. But if the sharp gain in LNG prices raises naphtha use in Europe too, availability to export to Asia could be reduced. Asian naphtha demand has increased over recent quarters due to the firming LPG prices, robust petchem margins and new crackers coming online. According to Refinitiv, Asian naphtha imports averaged over 6.65Mt per month in 3Q, compared to the year-to-date average of 6.28Mt, and 6.18Mt in 1H21. This has supported long-haul LR trade as around 35% of this has been western arbitrage volumes and 45% from the Middle East.

Seasonal LNG Prices: TTF ($/MMBtu)



Source: ICE


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