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LNG Traders Look To Make Huge Profits Using ‘Idle Tankers’

Tsvetana Paraskova

Spot LNG prices are currently at their lowest in three to four years, but the futures curve of the LNG market points to a wide premium of prices in the coming winter months over current prices—so wide that some traders may have started to use full LNG tankers as floating storage, awaiting the winter heating season and higher prices.

LNG tanker owners and producers say that the current market structure would make sense for traders to sit the current low prices out by holding LNG cargoes in floating storage for a month or a few, hoping that prices will recover from multi-year lows once the heating season in the northern hemisphere, in the world’s top LNG importing region northeast Asia in particular, begins in October-November.

Around half a dozen LNG tankers are currently thought to be idling around the world, and some of those carriers may have been used for floating storage, according to vessel tracking data compiled by Bloomberg.

Betting on higher prices in the coming winter, traders could be looking to take advantage of the wide contango on the LNG market right now, analysts, LNG tanker owners and producers said.

Contango is the market structure in which front-month prices are lower than prices out in the future months—pointing to an oversupply and making storage for future sales profitable.

In the first days of August, Asian spot prices slumped to more than a three-year low of US$4.10 per million British thermal units (MMBtu), and spot cargo deals have been made even at below US$4/MMBtu in the past weeks.

A week later, by August 9, prices had recovered slightly to US$4.20 per MMBtu, as hot weather in parts of the largest LNG importers in world—Japan, China, and South Korea—spurred some demand. As of last week, Asian LNG spot prices for October were estimated at US$4.75 per MMBtu, trade sources tell Reuters, which suggests that there are trading opportunities.

Two weeks ago, industry sources told Reuters that traders had started to inquire about potentially hiring LNG tankers for storing or shipping the super-chilled fuel. The wide contango makes floating LNG storage a possibility right now, some traders told Reuters, while others warned that a rush to floating storage would send shipping rates higher, which in turn would make the purpose of floating LNG storage moot.

Related: US Gas Prices Slump Despite Soaring Demand

In its Q2 earnings call last week, U.S. LNG producer and exporter Cheniere Energy said that the steep contango points to demand growing into the winter season and allows for some floating storage opportunities.

“Looking beyond the current shoulder season however, Asian and European and benchmarks are both trading in steep contango indicating that demand is expected to pick up again going into the winter season,” Cheniere Energy’s Executive Vice President and Chief Commercial Officer, Anatol Feygin, said.

Executive Vice President and Chief Financial Officer, Michael Wortley, added:

“And things like in the short-term market, the steep contango driving floating storage dynamics just like it did a year ago.”

Cheniere believes that in Europe “there will be opportunities to use a floating storage in order to take advantage of this contango,” Feygin said. 

Last year’s mild winter in northeast Asia turned out to be harsh for LNG price bulls. Sure, demand did increase compared to the previous winter season, but prices did not, due to the milder weather and to growing new supply on the LNG market.

Demand in the fourth quarter this year—when the winter begins in the northern hemisphere—will lift LNG prices, and traders hope that prices will be high enough to justify idling tankers to use them as floating storage until prices pick up.

By Tsvetana Paraskova for Oilprice.com

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