LNG traders consider shipping options, betting on winter demand

SINGAPORE: Traders are starting to make enquiries to book vessels to store or ship liquefied natural gas (LNG) as they bet for winter demand to boost prices for spot cargoes which are trading near record lows, multiple industry sources said on Friday.

Enquiries are trickling in for booking vessels on a spot basis, ranging from a period of one month to several months, which is expected to push shipping rates up, the sources said.

With Asia LNG spot cargoes trading at below $4 per million British thermal units, traders may take the opportunity to buy the cargoes now for later use, especially as demand typically increases during winter for heating which in turn pushes up prices, the sources said.

Storing commodity cargoes on ships to sell at a later date to take advantage of the rising price for later-dated supplies, known as the contango carry trade, is common in oil markets but is considered risky for LNG because of high storage costs and because LNG cargoes evaporate over time.

November LNG spot prices are estimated to be about $1 per million British thermal units (mmBtu) higher than October spot prices while October spot prices are likely about 70 to 90 cents higher than September prices, the sources added. A market structure where later-dated prices are higher than prompt supplies is called a contango.

"At 90 cents contango, floating storage is starting to make sense and at $1.50 people will be jumping on it," a Singapore-based LNG trader said, adding that the wide price spread signals the temporary storage of LNG on tankers a possibility.

At least one Japanese trader has issued a vessel enquiry for 60 days to charter an Australian cargo loading in September, said a second shipbroker.

Last year, more than 30 vessels globally were flagged as floating storage ahead of winter as traders bet that demand would increase exponentially like it did the year before. But, spot prices subsequently fell amid a mild winter.

This year, an abundance of supply globally from new projects has pushed spot prices to record lows. <LNG-AS>

Still, some traders are adopting the a more cautious approach given the uncertain economic outlook.

"While the forward curve (suggests floating storage works), I personally do not think (it) works as ... the cost of hiring ships will go up when there are too many cargoes," a second Singapore-based trader said.