LNG inter-basin trade for Atlantic cargoes to Asia scarce despite favorable arbitrage

The US-Asia arbitrage for Atlantic LNG cargoes into Asia presented little options for traders to engage in inter-basin trades in November, tempering the opportunity provided by the arbitrage window entering the positive territory, according to an analysis of market data and industry feedback.

The freight route cost for carriers travelling from the US Gulf Coast via the Panama Canal was competitive relative to the JKM-NWE spread.

The US-Asia arbitrage opened with the H1 January JKM/H2 December NWE spread against the USGC-to-North Asia/Northwest Europe freight rate via the Panama Canal at 70.9 cents/MMBtu on Nov. 29, S&P Global Commodity Insights data showed.

However, tightened restrictions on the route caused by a historic drought are causing more lifters of US LNG to bypass the Panama Canal.

Only one LNG vessel was reported to be transiting through the Panama Canal in the week ended Nov. 26. The highest number of LNG vessels transiting through the Panama Canal this year was seven, recorded in the week ended Jan. 15.

Additionally, the arbitrage opportunity fades when traders consider using alternative freight routes that present fewer logistical issues -- namely the Suez Canal and the Cape of Good Hope due to high freight route costs.

Platts, part of S&P Global, assessed the freight costs from the US Gulf Coast via the Suez Canal and Cape of Good Hope to the Japan/Korea discharge ports at $5.63/MMBtu and $5.71/MMBtu, respectively on Nov. 29.

An S&P Global report on Nov. 29 noted that shipping around the Cape of Good Hope or through the Suez Canal costs an additional 6%-7% of the spot price when compared to shipping through the Panama Canal.

"This is a significant competitive disadvantage for cargoes that must avoid the Panama Canal," analysts at S&P Global said in the report.

The higher freight cost is on the back of longer shipping routes -- it takes 24 days for an LNG cargo from Sabine Pass in the US Gulf Coast to reach Northeast Asia via the Panama Canal, but 36 days via the Suez Canal and 38 days via the Cape of Good Hope, according to sources.

An LNG industry source noted that charter rates will likely remain supported as persistent Panama Canal challenges get exacerbated by tensions related to ships transiting the Red Sea.

However, a second industry source said that the arbitrage may be workable for some market participants. "It depends on whether the company has the shipping position to bring Atlantic volumes over to Asia," the trader said.

Offers with US load ports reported during the Platts physical Market on Close assessment process may be an indication of the US-Asia arbitrage opportunities via the Suez Canal or the Cape of Good Hope transits.

As of Nov. 29, 21 out of 180 (11.67%) offers reported on the Platts physical MOC assessment nominated US base load ports in November.

Asian markets mostly tranquil

The closed US-Asia arbitrage has not caused major concerns for the Asian market due to comfortable inventory levels across the region and milder temperature forecasts, according to participants.

"There seems to be an oversupply in the market at the moment," a Singapore-based trader said.

Healthy inventory levels in North Asia will keep a lid on prices as the region meets its winter demand, a market source said. Meanwhile, as European inventories are drawn down, counterbalancing forces -- ample floating storage tonnage around the region -- means that ships will discharge the cargo there and come into the market.

"Qatari cargoes and Australian shipments don't need to go through the Canal or the Red Sea. So, Asia will not likely face any supply issues to meet winter procurement demand," the source added.

However, market participants noted that the closed arbitrage could have an impact if a cold snap were to hit the market in the upcoming winter season, as Asia would have to compete with Europe to receive extra LNG cargoes from the US.

Market participants also noted that the LPG market remains most vulnerable to the ongoing delays at the Panama Canal.

"Based on the situation of slot bidding in the canal queue, the most affected ship type is still LPG transport ships, and there has not yet been a substantial direct impact on LNG transport ships," a charterer said.