Spot rates brace for uncertain impact of coronavirus
Market participants agree that the coronavirus will play a key role for the LNG spot shipping market over the coming quarter, but diverge on what its likely impact will be.
Add to this consistent demand in the Atlantic due to US cargoes and a low-price LNG environment, and the picture quickly becomes a tug of war between lower-than-expected demand for LNG across much of the world, which is bearish for shipping, against Atlantic cargoes that may need to load, which is a bullish factor.
Record low LNG prices
The second quarter is usually a cyclically low period during the calendar year for LNG spot shipping . The LNG Atlantic and Pacific shipping rates averaged at $50,000/day and $45,000/day respectively over Q2 2019, and were lower than their counterparts in Q1, Q3 and the peak Q4 period. The LNG spot shipping market showed a similar pattern this year, with prices falling from an average of $90,000/ day at the start of the year toward a year-to-date low in the mid-to-high 30,000s/day across both basins by early March, but rebounded toward an average of $50,000/day by the end of March. The rebound in the shipping market across both basins was attributed to two main factors, according to market participants — an improving LNG market and increased chartering activity in the Atlantic basin.
However, now that the JKM , the benchmark price for LNG, had fallen to a record low of $2.35/MMBtu March 31, and with the DES Northwest Europe marker assessed at $1.849/MMBtu March 30, the lowest-ever number since Platts assessed this from 2010, it’s likely that one of the two legs supporting spot LNG shipping is gone.
“The bottom this time could be a lot lower and last longer, we also have uncertainties in Europe ,” said a Northeast Asia buyer.
“The price fall this time is a lot worse as many more companies are issuing force majeure or cancelling cargoes [compared to the previous time], the weather is also warmer, so consumption lowered,” another Northeast Asian buyer said.
“The bottom this time could be a lot lower and last longer, we also have uncertainties in Europe" – Northeast Asia LNG buyer
No consensus
On the other hand sources agree that Atlantic chartering activity will remain, as cargoes continue to be produced across the US , Algeria , and Nigeria . However, questions remain as to the extent to which this can provide support, given the potential of shut-ins as evidenced by Cheniere ’s recent tender to buy six DES cargoes for monthly delivery between May and December. Sources said Cheniere is likely to be purchasing now as the economics are better than producing cargoes, in this low-priced environment.
“Prices are good to buy right now, and if they buy now, maybe they don’t produce,” said one trader source. “This tender is sending a signal to the market that they are considering shut-ins.”
While the coronavirus has led to demand destruction in India and Europe, its impact remains unclear for LNG shipping.
One charterer said it had the potential to lead to lower supply in the spot market, as “post-lockdown industry will take months to resume so ships will float waiting for demand to pick up,” and that this could last from one to three weeks.
These delays could result in spot vessels re-delivering and becoming available for business later rather than sooner. However, the impact is partly negated by a more flexible spot fleet, as it has become cheaper – especially for independent owners – to ballast cross-basin in search of business, with fuel-oil prices coming down to $250-$260/mt levels.
“This tender is sending a signal to the market that they are considering shut-ins” – LNG trader source
In contrast a shipbroker said the Cheniere tender should act as a warning sign for LNG shipping market of the potential of lower spot demand. Overall the shipbroker felt that the LNG spot market over Q2 2020 will be rangebound, with the Atlantic LNG rate in the $30,000s/day to $50,000s/ day while the Pacific LNG rate is around $5,000/day less, with the Atlantic cargo market providing support to the bottom and low LNG prices capping the ceiling, while coronavirus acts as a swing factor.
— Wyatt Wong, Associate Editor, LNG Freight