LNG floating storage klaxon sounds again

Floating storage and slow sailing had already become hallmarks of the LNG market, before global gas’ paradigm shift that started in 2021, having been frequently seen in Europe and Asia as traders looked to push supply along late-year pricing contangos. And despite 2022’s unprecedented events, the queueing of laden carriers offshore key demand markets and the lowering of sailing speeds still returned as summer tipped into winter.

The floating storage incentives have returned for later this year, and traders have been well aware of them for more than a few months. But the LNG market can differ considerably each year from the last, as has shown to be true. Forward LNG and gas prices for Europe and Asia are much lower than they were during the 2022 summer, while Europe’s race for LNG last year will have lasting effects on the region’s import infrastructure. Both factors are set to impact how floating storage in Europe could look this time round.

Kicking the bucket down the road

Underpinning floating LNG storage in previous late summer-early winter periods is one of the LNG market’s key price drivers – the difference between the seasonality of global demand and the far more tempered fluctuations in LNG production, which can lead to surplus supply in late summer and early winter that has to be pushed further into the year when the northern hemisphere’s heating demand fully rears its head. 
The same forces are at play this time as well. Europe’s gas storage sites are largely heading for near-maximum inventories by the start of winter, aided by a storage overhang heading into summer that mirrored 2020’s stocks in size, which would severely curb the ability of Europe to absorb surplus molecules at the turn of seasons. 

The LNG supply outlook for early winter looks stronger than last time too, with global loadings set to be mainly buoyed by the return of the US’ 15mn t/yr Freeport LNG export terminal as well as other, smaller liquefaction capacity additions and optimisation.

Forward spot charter rates and European delivered LNG prices assessed in recent weeks suggest an incentive for firms to delay October deliveries to the region well into November and potentially as far as early December, when accounting for additional vessel hire and boil-off losses incurred.

Flat price terra firma

LNG and gas prices in Europe and Asia have fallen back to more familiar levels after breaking into the stratosphere in 2022. But these lower prices leave much less space for temporal price spreads to grow and keep pace with any gains in floating storage costs that stem from higher rates as charterers jostle for finite available LNG shipping capacity. In turn, this suggests that there is scope for a tightening of LNG shipping capacity that could close the floating storage arbitrage.

Prompt spot LNG charter rates over the fourth quarter of last year also far surpassed previous records, driven by demand for carriers to float the cargoes. But this huge jump in freight costs was not enough to slam the floating storage arbitrage shut. Instead, prompt LNG and gas hub prices in Europe crumbled under the weight of excess gas to increase their discounts to the much higher prices for delivery slightly further into winter, countering the higher freight costs and leaving an incentive to keep floating cargoes and hold off regasifying LNG in onshore tanks. At its greatest, the Dutch TTF gas hub’s front-month contract held a $26.57/mn Btu premium over its day-ahead price, while the northwest Europe third half-month des price was as much as $15/mn Btu above the corresponding first half-month price. In turn, this has driven vessel availability down to near-zero and almost halted prompt Atlantic chartering activity entirely.

The lack of potential downward movement available to gas and LNG prices, without turning negative, may keep a lid on how many molecules can be kicked down the road.

Europe’s onshore LNG storage hurdle

Europe has made several LNG import capacity additions over the past year, largely in markets previously dependent on Russian gas supply. But while the region’s aggregate regasification capacity has jumped, its growth is fragmented over a greater number of terminals and has been quicker than the increase in total LNG storage capacity. 

Almost all new import infrastructure has come in the form of floating storage and regasification units (FSRUs) or similar infrastructure – a selection necessitated by the much shorter timeframes needed to bring such import projects on line than with onshore terminals which count their construction times in years. 

A key downfall of using these offshore units is that they have limited LNG storage capacity, with each FSRU typically capable of holding roughly just one standard cargo of LNG at any time. This leaves capacity holders at FSRU-based import terminals with little ability to store LNG at the facility and regasify later in the winter, which had been widespread during previous occasions of European floating storage, albeit less so in 2022 – with the exception of Spain – when high terminal stocks throughout summer limited available space for firms to take advantage of temporal price spreads for the fourth quarter. 

Additionally, most of these offshore terminals have multiple users, meaning that stocks must be drawn down to allow space for the next import slot’s owner to bring in its own cargo. This could either push firms to instead float their cargoes to their next import slot, or bolster excess gas supply downstream from the facilities. 

The buildout of Europe’s regasification capacity, particularly the additions in Germany, the Netherlands, France and Italy, could also aid the drawdown of floating storage later in the winter, contrasting with last year when high sendout capacity utilisation kept laden carriers on the water well into the heating season. 

The flexibility afforded by this new capacity goes further too, allowing more LNG to be imported should heating demand rise substantially in the event of any early winter cold snap, thereby limiting the need for Europe to dip early into its underground gas stocks and aiding the preservation of these inventories for the latter part of the season.

NW Europe inter-month des price spreads