As the shipping world focuses on the Ever Given tanker issue in the Suez Canal, it seems fitting to highlight the read through for global gas markets. For most of our clients/readers the relevance re: specific impacts on the domestic natural gas market are of significant interest. With over 11 Bcf/d now consistently being sent to LNG liquefaction plants in the U.S. for ultimate delivery to downstream markets in Asia, Europe, South America, and a few other locales it would clearly be a calamity if the ability to export were hindered by a capacity constraint to deliver into these markets.
The beauty of delivering super cooled natural gas via tanker is that the oceans themselves literally offer zero capacity constraints. Yes, weather can certainly impact the ability to get gas on the water in the first place, and weather events in downstream markets can temporarily limit the ability to get it Re-gasified where it is needed. However, considering the duration of such events in comparison to the time it takes to reach downstream markets these events are ultimately minor disruptions.
A counter argument to our tongue in cheek headline is the fact that available tanker capacity most certainly does provide a limit to how much natural gas can be moved from one market to another. This reality manifested in late 2020 when shipping rates for some spot cargoes climbed above $300k per day. The other not as frequently discussed counter argument is the fact that a meaningful amount of LNG is shipped through both the Suez and Panama canals. Current events in the Middle East and last years bottleneck in Central America highlight how fragile the global LNG market can quickly become when delivery paths are disrupted.
The late 2020 occurrence of spiking LNG spot charter rates was led by spiking downstream prices. In such instances it is important to appreciate the capability for LNG cargos to be swapped. While not all LNG cargos have destination flexibility, at the right price an efficient market will find a way to re-route a cargo that is destined for Asia through a constrained Panama Canal to a destination in Europe, while concurrently the Asian need can be fulfilled by a Qatari, Australian, or PNG cargo, for instance. Keep in mind the ability to ship around both Cape Horn and the Cape of Good Hope are pathways which eliminate constraint issues in the Middle East and Central America. While not nearly as efficient, and thus significantly more costly, these options are available.
Now turning to why this all should matter to both producers and consumers of North American natural gas, lets first point out where LNG feedgas demand in the U.S. is now versus where it was at the same time last year. The aforementioned 11 Bcf/d plus that is currently being delivered to liquefaction plants in the U.S. is approximately 3 Bcf/d higher than the April 2020 daily average, and an even more eye-popping 8 Bcf/d higher than the July 2020 average. This summers LNG exports while have easy year-over-year comps to beat, with last year’s sendout being crushed by extremely elevated European storage levels and a global shutdown in response to COVID-19 uncertainty.
At first glance it is quickly apparent that demand for U.S. sourced LNG feedgas will be up substantially year-over-year, and a big part of price support at the front of the curve. Add in the fact that European storage is almost one Tcf lower than the same point last year, and Asian economic activity appears to be humming along; what remains is little concern for reverberating negative price impacts on the domestic natural gas market. We agree that this is undoubtedly the most likely scenario, and even see far greater upside v. downside price risk over the next 12-18 months, yet the issue of inaccessible canal passage in the either the Middle East or Central America is important to keep an eye on.
Zane Curry
Zane has been with Mobius Risk Group since February of 2016. His primary responsibility is a fundamental analysis of the North American natural gas market. Additionally, he assists in the valuation of gathering, processing, transportation, and physical sales agreements. His experience in energy has been focused on natural gas, however, as the North American hydrocarbon value chain has become a more integrated system his knowledge has expanded to crude oil, petroleum products, and seaborne LNG. Prior to joining Mobius, Zane spent 6.5 years with a Houston based hedge fund (Goldfinch Capital) with AUM of approximately $750M. In his time with Goldfinch Capital, Zane was tasked with developing detailed models of the North American natural gas market, including 1st derivative components such as power generation by fuel source, supply side impacts of liquids focused drilling, etc. Zane is a graduate of Rice University, and a former member of his alma mater’s baseball program as both a player and coach.