The forward inter-basin arbitrage to ship US Gulf coast LNG to northeast Asia by the Cape of Good Hope in the winter is closed, even assuming sunk freight costs, as boil-off costs are greater than the northeast Asia des premium to northwest Europe.
Assuming an extra 55-day round trip from the Gulf coast to northeast Asia compared with northwest Europe, firms would pay over $1/mn Btu in boil-off costs alone, if they use a 174,000m³ two-stroke carrier with a 0.08pc/d boil-off rate (see boil-off graph). For every $1/mn Btu that Asian prices rise, should des spreads hold steady, the boil-off difference between delivering to Asia and Europe increases by 4.5¢/mn Btu.
Boil-off costs are now higher than the inter-basin des spread for November-March, assuming delivery to Asia a month later than Europe. And boil-off costs are also greater even assuming no delivery lag over December-March.
This means that for the inter-basin arbitrage to be open on a forward basis, charter rates would have to be negative, even with no delivery month lag (see implied charter rate graph).
Some Asian firms with Atlantic basin offtake have taken term cargoes from the US to their own import terminals since the strait of Hormuz was essentially closed to tanker traffic because of supply security concerns, even if there was a slight incentive to deliver elsewhere.
Given the clear incentive to deliver to Europe over the winter instead of Asia, it is more profitable to deliver to Europe and buy cargoes from Asia to backfill lost supply. But if the strait of Hormuz remains closed later in the winter, Asia will probably need to compete for at least some Atlantic basin supply, as December and January is when Asian demand peaks, suggesting inter-basin des spreads would need to widen.
The inter-basin arbitrage is firmly closed later in the first quarter because of backwardation in delivered prices, which means that delivering in a later month to Asia can lead to a des spread of more than $4/mn Btu compared with delivering to Europe.
