A new era is dawning for the global LNG freight market. No longer is the global natural gas market restricted by point-to-point term contracts, with fragmented regional markets limited by expensive and static pipeline infrastructure. LNG vessels are challenging the traditional role played by pipelines, and they are vastly more flexible in their offering. But with this ever-increasing flexibility comes the need for greater risk management, and many market participants are now calling for a financial instrument, alongside independently assessed forward curves, to help manage their exposure to a very volatile freight market.
The growth of the global LNG spot market is reshaping the world’s natural gas markets. Spot trade now accounts for around 20pc of the total LNG market, which is in turn driving a burgeoning spot market for LNG freight. The requirement for spot vessel charters is increasing as more firms start becoming active in LNG trading. Meanwhile, distances between the supplier and consumer of the fuel have grown with the advent of US LNG exports, leading to a significant increase in day charter rate volatility.
For many years, Argus assessed day charter rates traded in a $30,000-90,000/d band, but the market started to change in winter 2018-19. Significant growth in global LNG supply and the opening up of inter-basin arbitrages drove volatility in the freight market, as vessel deliveries struggled to keep pace and existing vessels were chartered for longer journeys. In November 2018, day charter rates hit almost $200,000/d as many spot vessels were used as floating storage to enable trading firms to take advantage of the price contango in the market at the time.
More recently, Argus Round Voyage (ARV) rates stood at around $170,000/d when the assessments were launched in October for three benchmark routes. The continued ramp-up of US LNG exports is boosting freight demand, given US liquefaction facilities have globally the highest tonnage demand — the number of vessels required to load each million tonnes. A steep contango in northeast Asian and European delivered LNG prices encouraged firms to delay deliveries of cargoes loaded in September or early October to December. This helped to tighten vessel availability in both basins and supported spot charter rates. But the market is not expecting charter rates to remain at recent levels, with much more volatility anticipated heading into 2020. The recently launched Argus forward freight curve for summer 2020 pegged June as low as $60,000/d.
With the elevated freight rate volatility and as new liquefaction capacity comes online driving a rise in export shipments, the requirement has grown for trusted benchmarks and independently published forward curves to manage the increased risk to LNG market participants. LNG freight derivatives can be used to hedge freight risk or to manage risk between global gas hub positions, and market participants are increasingly calling for such products to be made more readily available.
This year’s call for papers deadline is 24 January 2020 and we are inviting you and your colleagues to submit strategic or technical papers for consideration to speak at Gastech 2020’s Conference!
Over 250 international speakers took to the stage at the globally renowned Gastech Strategic and Technical Conferences last year, is Gastech 2020 Singapore your turn?
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