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Narrower JKM contango structure may prompt reduction in LNG floating storage

Singapore — The build up of LNG vessels as floating storage is expected to drop with narrower JKM contango market structure providing less incentive to sellers to float their cargoes further down the curve.

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The Sep/Oct, Oct/Nov and Nov/Dec JKM contango structure has narrowed by 30.7 cents/MMBtu, 40 cents/MMBtu and 17.5 cents/MMBtu to $27.5 cents/MMBtu, 45 cents/MMBtu and 50 cents/MMBtu, respectively.

With Atlantic spot freight rate assessed at $40,000/day, the cost of floating a vessel for a month including chartering and boil-off was estimated about 36 cents/MMBtu.

Similarly, the cost of carry for cargoes further down the curve in October and November with freight estimated at $50,000-$55,000/day is around 45-50 cents/MMBtu. Thus rendering floating storage as uneconomical at the current market prices.

"Floating your vessels now is not economical anymore if you had not locked in the margins by hedging JKM paper," an Asian portfolio player said.

The contango structure has flattened due to the rally in prompt prices along with expectations of lesser cancellations of US cargoes from September loading onwards, market sources said.

JKM has rallied by more than 56% over the last month to hit a six-month high of $3.65/MMBtu on Aug. 13 due to supply uncertainty from an extended maintenance in Australia's Gorgon LNG facility and stronger European gas and Henry-Hub prices.

Due to the wide JKM derivatives contango market structure and weaker freight rate in July, floating storage had swelled up to above 3,100 million cu m, almost three times the average of July floating storage from 2017-2019, Platts Analytics data showed.

In July, a portfolio major and a Chinese NOC were heard to have procured a few large cargoes in order to float these cargoes into October and November to monetize the contango market structure.

The reduction in floating storage could add pressure on spot LNG prices going forward, which otherwise is buoyed on supply uncertainty from Gorgon LNG facility, traders said.