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Bloomberg
Liquefied natural gas (LNG) traders are following the latest trend in the oil market by storing huge amounts of the commodity on tankers, hoping prices will rise before the ship docks.
But while crude can sit for months or even years in a tank, super-chilled LNG tends to evaporate even in the specialised vessels that handle it. That limits the amount of time “floating storage†is feasible.
“Keeping gas frozen is extremely expensive because of the energy cost to maintain the ultra-low minus-265-degree Fahrenheit temperature,†said Francisco Blanch, head of global commodities and derivative research for Bank of America (BofA) Corp in New York.
The number of vessels used for floating storage was at 17 late last month, but has now eased to 13 after some unloaded their cargoes in India, according to data intelligence company Kpler. Three vessels have been idle for more than 10 days, Kyriakos Mezopoulos, director for LNG at Affinity, said in a note.
More ships acting like storage tanks might also be a sign the LNG industry is poised to cut production. They’re reacting to a crash in prices as demand slowed, the result of two warm winters in a row and the coronavirus, which has shut huge parts of the global economy.
US LNG producer Cheniere Energy Inc is already sourcing cargoes in Europe, with some traders and analysts speculating that this could be ahead of temporary production cuts.
Spot LNG in Asia, the biggest consuming region, slumped to a record this week, and prices in Europe are also testing all-time lows. And unlike in oil, where markets indicate a rebound in prices in the months ahead, a surge in forward rates for LNG is too far off to matter.
“We clearly see floating storage as a safety valve in the next couple of weeks and even in the next couple of months,†Jefferson Clarke, managing director for LNG at shipbroker Poten & Partners Inc, said.
In the crude oil market, plunging prices triggered a huge contango, where traders anticipate gains in future months and have an incentive to put the commodity into storage for months or years. They’ve hired tankers because storage sites on land are almost full.
The dynamics are different in the gas industry, where gas storage sites on land that should be near empty still have fuel from last year. Also, the “boil-off†rate is a factor for LNG.
Between 0.07% to 0.15% on average evaporates from LNG tankers per day for the majority of the global fleet. That means over a 75 day voyage, about 5% to 11% of the original cargo could be lost.
Last fall, some traders loaded cargoes at low prices in August and discharged in early November when rates were rising.
While new vessels have better technology that limits the evaporation rate — Flex LNG Ltd has three ships for delivery later this year with a boil-off of about 0.035% — the difficulty containing the gas over long periods means using tankers as storage has a physical limit.