Pic: LNG power plant in Europe

A surge in European LNG imports and feeble Asian LNG demand led to increased vessel supply in the West of Suez, curbing LNG shipping rates. In January 2021, vessel rates reached a high of $350,000pd along with the surge in LNG spot prices. However, LNG shipping rates have been struggling near the $50,000pd mark in January 2022 despite spot LNG prices at higher levels than last year.

The European energy crisis

Europe is currently facing an energy crisis, impacting the industrial and residential sectors. At the end of the 2021 winter (which also extended to April), European gas storage was 30% full (compared to 54% in 2020). Energy transition along with decarbonisation goals favoured renewable energy capacity build-up, resulting into a declining domestic gas production. However, wind energy production stalled in the region, forcing countries to increase their use of natural gas.

European LNG imports slumped in mid-2021 despite high gas demand and low storage. Similarly, LNG demand also expanded in Asia and South America. Although extreme winter led to the depletion of gas inventory, a severe drought in Brazil forced the country to increase its gas power generation capacity to counterbalance the fall in hydropower generation. Robust LNG demand in all regions increased the competition for spot LNG cargoes, in turn, inflating prices. Asian countries such as China, Japan and South Korea aggressively procured spot LNG to refill their depleted reserves to cater to a high summer demand and maintain inventories for the winter.

Around one-third of European gas demand is met by Russian pipeline supply (including the UK), which has been a cause of concern amid the Ukraine-Russia trade tension. In 2021, Europe-Russia friction was related to the Nordstream II pipeline between Russia and Germany, which faced opposition from the European Union and the US as it increased Europe’s dependency on Russian gas while also conflicting with Europe’s aspirations to shift from fossil fuels. Meanwhile, the Netherlands plans to shut down gas productions by early 2023 due to a rise in seismic activity at its Groningen gas field.

As a result of this friction, Russian pipeline supply to Europe declined nearly 20% in 2021, which along with the impacted domestic production and a highly competitive LNG market led to Europe’s inventory storage at historic lows in 2022.

All ships head towards Europe

By November, Asian LNG procurement had reached sufficient levels, leading to a fall in spot demand and spot prices weakening against TTF. Meanwhile, with the Russian pipeline supply still not increasing, the Dutch TTF proved to be highly volatile due to low storage and market sentiments.

The fall in Asian LNG prices contracted the price arbitrage, driving spot LNG cargoes towards Europe. About 60+ laden LNG carriers heading to Asia were diverted to Europe.

The trend is expected to remain firm, with TTF futures averaging $57 per MMBtu for January delivery compared to the Asian spot at $46 per MMBtu for February delivery. Meanwhile, vessels with Asian destinations are still being diverted with the US loaded Hellas Diana, executed a U-turn in the Pacific, crossed the Panama Canal twice and paid nearly a million in tolls.

As a result, European LNG imports surged at end 2021 topping 7 million tonnes in December alone, with most supply sent from the US. Cargoes from other LNG exporters – Qatar, Oman, Peru, Nigeria and Russia – also discharged at European terminals in this period while some cargoes were also sourced from as far as Indonesia and Australia.

More volatility likely in 2022

European gas inventories stood at 53% in the beginning of 2022 but slid to 45% by 18th January, implying that the surge in LNG imports has given little relief to the region. However, a drop in temperatures increased gas demand, curtailing the build-up in storage.

Meanwhile, milder than usual temperatures in Asia have weakened LNG demand than earlier expected. For instance, China’s CNOOC has marketed several spot LNG cargoes for 2022, indicating lower demand. The flurry of available spot cargoes is expected to bring LNG prices down and allow Europe to keep its LNG imports high.

Meanwhile, no additional Russian gas supply is flowing into Europe as the geopolitical tensions between Russia and the EU, and the US over Ukraine has worsened the possibility of pipeline supply resuming anytime soon. Russia’s Gazprom is pushing Europe to sign long-term gas supply deals with Russia, which Europe is reluctant as it wants to move towards renewables. Although the Nordstream II pipeline is complete, its operations have been pushed further into 2022 with German regulators demanding a neutral operator for the pipeline other than Gazprom.

Amid the geopolitical uncertainty regarding pipeline supply, Europe is heading towards record low gas storage which will be problematic in case of harsh or extended winters. This will support LNG prices to maintain their high levels with chances of spiking further, impacting LNG imports in other price-sensitive markets.

Meanwhile, European gas demand is expected to remain high throughout the year – for heating in winter and restocking post-winter – which will shape the LNG shipping market. We expect tonne-mile demand to weaken, in turn, squeezing shipping rates. Drewry projects spot rates for a TFDE carrier to average $62,500pd for 1Q22.

We also believe that vessel rates will average $72,000pd if temperatures drop in Asia during February-March.

Furthermore, the recovery in Russian pipeline supply to Europe in 2022 will favour shipping rates as it would make LNG available (and affordable) for countries in Asia and South America facing gas shortages.

Marex Media

Source: Drewry