A tight LNG shipping market is prompting some firms to consider cancelling US LNG cargoes, despite the recent rally in Asian prices theoretically ensuring ample margins, market participants told Argus today.
Firms are mulling cancellations for some January cargoes from liquefaction tolling projects such as the 15mn t/yr Cameron and 15mn t/yr Freeport terminals, which require offtakers to confirm their loading schedule closer to delivery than at Cheniere's 25mn t/yr Sabine Pass and 15mn t/yr Corpus Christi terminals.
The deadline for confirming January cargoes at Cheniere's facilities already passed on 20 November, with possibly only a handful of cargoes, if any, being cancelled. Some of Cheniere's offtakers may also be considering cancellations of February cargoes, and must notify the operator by 20 December. The number of cancellations is likely to be much lower than throughout the past summer, market participants said, but could curb US exports over the period.
Strong Asian demand has pushed delivered prices in the region to multi-year highs in recent days, opening a wide arbitrage between the two basins. The Argus northeast Asia (ANEA) front half-month des price stood $6.71/mn Btu above the corresponding price for deliveries into northwest Europe — the widest differential between the two prices since February 2014.
The ample premium offered by Asian markets was meant to incentivise strong inter-basin flows amid tight supply availability in the Pacific, where the supply pool available for prompt deliveries had all but dried up in recent weeks. But the wide arbitrage had the side effect of sharply tightening the shipping market, as deliveries to the Pacific basin require twice the tonnage needed for deliveries within the Atlantic. This may have curtailed firms' ability to physically deliver US cargoes to Asian buyers.
Few free vessels left in charter market
Spot charter rates have risen sharply in recent days to incentivise subletting of vessels, amid minimal availability of LNG carriers.
The Argus Round Voyages (ARV) rate for US deliveries to northeast Asia has reached $169,000/d in recent days, up from $108,000/d at the beginning of December this year and around $107,000/d in mid-December 2019. The expansion of liquefaction capacity in the US has outpaced growth in the global fleet of LNG carriers in recent years, leaving the shipping market increasingly sensitive to sudden shifts in global trade flows.
Recent congestion at the Panama Canal may have exacerbated tightness in the shipping market, with firms that were unable to secure transit slots at the waterway opting to deliver cargoes through the longer Cape of Good Hope route — inflating delivery times and shipping costs. At present, shipping US cargoes to South Korea via the Cape of Good Hope costs around $4.34/mn Btu, compared with $3.10/mn Btu via Panama. The differential is even wider for deliveries to Japan, which cost around $4.40/mn Btu through the Cape of Good Hope compared with $2.78/mn Btu via Panama.
The higher charter rates have failed to spur significant subletting, with almost all carriers already tied to delivery obligations to northeast Asia, market participants said. Only a single vessel was available in the Pacific basin yesterday, and none in the Atlantic, shipbrokers noted.
Tight shipping drives uneconomical cancellations
Firms are considering cancellations as they are unable to secure sufficient tonnage for deliveries into Asia, and the rally in charter rates makes deliveries to Europe uneconomical.
Traders are considering cancelling US cargoes and seeking alternative volumes in the Pacific, despite the move being largely uneconomical. Delivering US volumes to Asia would allow firms to recoup take-or-pay liquefaction fees and still make ample margins, given the wide inter-basin arbitrage. But spot availability in the Pacific remains tight, and producers in the basin are unlikely to offer sufficient discounts to cover the cancellation cost while also ensuring comparable margins.
At the current feedgas cost and assuming deliveries via the Cape of Good Hope, most US offtakers could deliver January-loading cargoes to northeast Asia at $10.50-11/mn Btu. These would be delivered in February, resulting in a net profit of $0.72-2.16/mn Btu. Given the sunk liquefaction fee, Pacific producers would need to offer des prices of $7.50-8.00/mn Btu — or fob prices of $6.40-6.90/mn Btu, given shipping costs of about $1.10/mn Btu — to ensure the same returns.
US offtakers could still lift their cargoes for deliveries to Europe, which would allow them to recoup at least part of the sunk liquefaction fee, based on LNG delivered prices into Europe at present. But given the wide inter-basin price differential, firms are expecting greater returns by concentrating any shipping length on fewer, more-profitable deliveries to Asia, even if that requires some cargoes to be cancelled, market participants noted. Similarly, European reloads are theoretically profitable, but the lack of shipping capacity has meant reloading activity in the region has remained minimal in recent weeks.
Lower incentive for February cancellations
A tighter inter-basin arbitrage for US February loadings could increase competition between the basins and ease pressure on the shipping market, despite spot vessel availability being widely expected to remain tight over the period.
The inter-basin differential for February loadings is around $3.74/mn Btu, considerably less than the $6.00/mn Btu differential for loadings a month earlier. This could give European buyers greater scope to compete with Asian buyers, with any redirection of flows towards closer markets potentially easing pressure on des sellers' fleets. This may allow US offtakers to optimise their portfolio without the need to cancel deliveries.
