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Shipping’s surge and splurge

Spot rates should stay below 2018 peaks as more newbuilds come into service

The world is perennially awash in tankers, a welcome state of affairs for energy commodity shippers in need of cheap, readily available transport, and an unwelcome one for ship owners, who often struggle to break even. But LNG shipping is the exception to the rule-cargo demand has recently exceeded LNG tanker supply and shippers could face ongoing transport constraints and high costs in 2019.

During an unprecedented shipping crunch in October-November 2018, freight rates for spot vessels hit $200,000/d-an all-time record that topped the levels seen after 2011's Fukushima disaster. "There came a point where there were zero ships available. Everything was spoken for," IHS Markit LNG analyst Andres Rojas tells Petroleum Economist.

He believes last year's rate spike was driven by a confluence of events, including several one-offs: China, which is trying to transition away from coal, was bringing winter LNG buying forward after falling short in winter 2016-17; the spread between Atlantic and Pacific LNG pricing was unusually high, spurring more longer-haul, cross-basin arbitrage flows; new liquefaction capacity came on stream in the United States, Australia and Russia, pulling ships into prearranged long-term charters and out of spot service; and northeast Asian storage inventories rose to levels where tanks were full and over a dozen laden spot tankers were stuck at anchorage off Singapore, awaiting a buyer (in the most extreme example, one LNG tanker loaded in August did not unload until December).

Rojas expects rates and availability to be more palatable to LNG cargo interests this year. Evidence of lower shipping costs was already evident in late December, as spot rates fell to half their earlier highs, at around $100,000/d, according to price reporting agency Argus Media.

Rojas notes that as a result of high inventories, Northeast Asia LNG prices were down to $8.50/mn Btu by mid-December from highs of around $11.25/mn Btu in September. The UK hub pricing (NBP) was around $8.20/mn Btu in mid-December, equating to a $0.30/mn Btu arbitrage spread that was too slim to cover current Atlantic-to-Pacific shipping costs.

"Shipping rates are going to continue to come off in 2019," he forecasts, projecting that transport costs should come down far enough to allow for cross-basin trades at "only a small price differential between the Atlantic and Pacific LNG markets".

Other analysts disagree, predicting continued high pricing for LNG shipping, at least this year. "LNG freight is exceedingly tight and should remain tight through 2020," said Michael Webber, a shipping analyst at US bank Wells Fargo, in a mid-December presentation. Ben Nolan, a shipping analyst at investment bank Stifel, predicted in a year-end client note that "2019 [rates] should be relatively strong as cargo growth is likely to exceed new deliveries".

In the longer term, analysts generally agree that shipping rates are set to fall due to a spike in newbuild orders in 2018. "There was a huge rush to the yards to build, and a lot of speculative orders," says Rojas. "It is funny how these ship owners see rates go up for a few months and think they're going to stay up there for the next 20 years."

Nolan reported that 65 LNG carriers were ordered in 2018, "the most in any single year since 2004", with "supply starting to look really scary". To put last year's pace into perspective, data from consultancy IHS Markit shows orders for only 39 conventional LNG carriers across the whole 2015-17 period.

"We believe 2021 will almost certainly be oversupplied," says Nolan, who foresees a multi-year period of vessel oversupply thereafter as a result of "the torrid pace of new LNG vessel ordering". That is bad news for ship owners, but good news for shippers of LNG seeking more transport availability and lower rates.

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