High inventories, wider price contango boost LNG floating storage in July


Spot LNG prices languishing at record lows and a steep contango along the forward curve into the winter months has encouraged traders to monetize the market structure by floating their ships into the forward delivery months.

There has been a steady build up of floating LNG carriers at sea since early June, with over 25 LNG ships in the week started July 12, according to cFlow, S&P Global Platts trade-flow software. Through the month of June there were about 10-15 floating LNG ships across regions, but this rose to around 20 ships in early July, Platts cFlow data showed.

Traders and portfolio participants were taking advantage of the market structure to conduct carry trades, by chartering ships at current low prices and hedging their exposure by selling forward JKM Derivatives.

The September-October JKM Derivatives contango structure was assessed at 62.5 cents/MMBtu on July 14. With spot charter rates close to $30,000/d, the cost for floating a cargo was estimated at around 30-35 cents/MMBtu.

“There is going to be a big storage play going into winter this year with the current contango prices. If you can charter ships at low enough prices, then why not even float the cargo one or two months ahead to monetize the contango,” a Singapore-based trader said.
Floating LNG ships

Several ships were seen slow steaming, which refers to intentionally slowing the speed of a ship to optimize fuel consumption or delivery schedules, or homeless, which means they did not have a fixed destination.

Tokyo Gas’ 88,676 dwt ship Energy Liberty loaded at the Cove Point LNG terminal in the US on June 23 and initially signaled for discharge at the Sines LNG terminal in Portugal, with an ETA of June 28.

But on July 1, the ship changed its destination to Gate in Rotterdam with an ETA of July 27, and stopped short in its tracks on July 3 in the middle of the Atlantic Ocean, and has been slow steaming since then.

BP’s 94,558 dwt ship British Contributor was seen floating outside South Korea near the Gwangyang terminal for three weeks after having loaded from Freeport in late April. The ship was then diverted to CNOOC’s Tianjin LNG terminal in China, where it discharged its cargo on June 25, ship tracking data showed.

“British Contributor was probably a contango play by BP, it doesn’t make sense for them to float the cargo for so long to divert to another destination,” a trader with a European utility said.

Market sources attributed the increase in floating storage not only to contango plays but also to higher inventory levels at north Asian regasification terminals, with China, Japan and South Korea facing weak demand due to the pandemic along with an influx of cheap spot LNG cargoes.
High inventories, deferrals

End-users in Japan, South Korea and China experienced high inventory levels in June, and most buyers were absent from the spot market during the month as they did not have a clear outlook on downstream demand despite a warmer-than-usual summer in north Asia.

Sellers of contracted LNG volumes provided operational flexibility to their term buyers grappling with high inventories, allowing the cargoes to be floated beyond the designated date of delivery, so that end-users can receive them when inventories sufficiently draw down.

Additionally, Japanese buyers were swapping LNG cargoes as demand fluctuated, and South Korea’s Kogas was heard requesting other terminal users to delay or cancel their term cargoes, limiting available slots at the terminals for spot purchases.

These short-term deferrals also gave sellers a price advantage.

The August-September spread between physical LNG and LNG derivatives averaged 40 cents/MMBtu from June 16 to July 15, and the August-October spread averaged 88.7 cents/MMBtu.

“We are seeing more end-August deals transacted at levels closer to September derivatives as sellers would rather float their H2 August cargoes into September or offer end-August deliveries at September levels,” a Singapore-based trader said.

For instance, Sakhalin Energy’s tender for August 18 loading was heard awarded at $2.35-$2.40/MMBtu to Shell on a DES basis, which is closer to September prices.

While LNG cargo deferrals have been happening since Asia was hit by COVID-19 lockdowns and the resulting demand destruction in the first half of the year, short-term deferrals of delivery dates are in response to more urgent or real-time market fundamentals.
Source: Platts



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