Perfect storm pushes LNG sector into near crisis

Climate change and the ongoing political tensions with Russia have created a major shortage of liquefied natural gas (LNG) and with it a slump in trade for the LNG shipping sector.

As European gas prices continue to make headlines across the world, LNG analyst at shipbroker SSY Thanos Felios said a range of conditions and issues have created a perfect storm for the LNG sector and the European power market.

With Europe relying on Russia for around 35% of its natural gas, the increasing geopolitical tensions between Russia and the West have continued to disrupt supplies, which have seen a slump in recent months. The fears are that any further sanctions on Russia from the US are likely to further impact supplies.

He warned European gas storage supplies are low. The gas storages are mainly used as buffers during events of high demand and tight supply, but storage levels are low due to two main factors, both climate related.

The first was the delayed and prolonged cold winter in the first three months of last year. The second is the ongoing struggle to rebuild gas stocks during the summer period of 2021 due to the incredible hot weather (the summer of 2021 was Europe’s hottest on record).

Demand for power and with it gas demand has been strong in Asia which pulls LNG away from Europe. This has been due to a combination of the 2021 post-COVID economic recovery, the cold winter of Q1-2021, and the determination of the LNG buyers not to be ‘caught short’ in the winter of 21/22. This resulted in a continuous price rally between the world’s two major LNG indices, which led both to hit new all-time highs during 2021.

Severe drought in South America has limited hydroelectric output and this has pulled a significant amount of Atlantic’s LNG volumes.

This has been confounded by various LNG facilities experiencing outages which have in turn taken a significant volume of LNG supply off the market. i.e., The Hammerfest plant has been out of service since September 2020.

High European carbon prices have forced power generators to cut coal and use more gas. Carbon prices in Europe reached all times highs in 2021 as the EU reduced the supply of emissions credits, forcing highly polluting providers of energy production to reduce their reliance on coal.

Felios explained: “The very high LNG pricing environment that we are witnessing in Europe is unprecedented. The situation that we are seeing continues a rhetoric of extreme Gas/LNG pricing volatility. This in turn has resulted in a more and more volatile shipping market.

“Over the last 18 months, since the end of the first European covid-19 lockdown, LNG shipping has seen monumental highs in terms of “dollar per day” charter rates. We have also witnessed, as we are now, very low charter rates and rising shipping availability. In simple terms many more ships are staying in the Atlantic Basin (due to high EU demand) and not sailing to the Far East during the end of winter / start of spring. This has resulted in shorter tonne miles and less demand for tonnage to transport the LNG molecules.”

Demand for power and with it gas demand has been strong in Asia which pulls LNG away from Europe. This has been due to a combination of the 2021 post-COVID economic recovery, the cold winter of Q1-2021, and the determination of the LNG buyers not to be ‘caught short’ in the winter of 21/22. This resulted in a continuous price rally between the world’s two major LNG indices, which led both to hit new all-time highs during 2021.

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