Record-high spot LNG charter rates caught markets by surprise in 2018 demonstrating that bottlenecks can emerge suddenly and unexpectedly along the entire natural gas supply chain.
LNG shipping was a fairly uneventful and steady business during the 2015–2017 period and spot charter rates remained low as the market struggled to absorb excess shipping capacity. But in the second half of 2018, the LNG tanker market tightened, and daily shipping rates shot up to almost $200,000 by the end of the year, an all-time high for the LNG industry and more than four times higher than the 2017 average.
There were some structural drivers behind the tightening of the shipping market, such as the ramp-up of LNG supply in the US Gulf Coast and the Russian Arctic, which are farther away from the main LNG markets—and thus require more shipping capacity than the average exporter. Record-high LNG re-exports from Europe to Asia—a highly shipping-intensive activity—also contributed to rising tanker rates in 2018, especially in the third quarter.
But the most immediate cause of the LNG vessel crunch in late 2018 was China’s new LNG purchase strategy ahead of the winter. To avoid another winter gas shortage, China built substantial floating storage of LNG by the final quarter of 2018. Commercial players in other parts of Asia also parked LNG cargoes on the water in anticipation of higher prices during the winter months. But lower-than-expected demand in East Asia (due to mild winter weather in parts of the region and other bearish factors) meant that LNG in floating storage took longer to absorb, and thus a significant portion of spot LNG tanker capacity remained tied up for several weeks.
Some analysts speculated that sky-high shipping rates could be the new normal, while others warned that an acute LNG shipping market tightness could be a risk to supply security. We argued in an op-ed article last November that the system can adjust—as it has since then—and charter rates have dropped significantly in recent months. But greater volatility in spot LNG rates is a distinct possibility in the near term, at least until a new wave of vessel deliveries hits the market in a few years’ time, setting the stage for another boom-bust cycle in LNG shipping.
It is yet to be seen whether China’s front-loaded purchase strategy and use of LNG tankers as floating storage ahead of the winter season will be a one-off experiment or a recurring phenomenon in the global gas market. If the pattern continues in the years ahead, it could have profound implications for spot LNG tanker rates and spot LNG markets alike.
This article is an excerpt from A Changing Global Gas Order 3.0, a recent publication. The paper discusses the latest trends and developments in the global natural gas market and is available on the Center on Global Energy Policy website.
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