European LNG demand growth will not be sufficient to raise LNG shipping freight rates, according to the LNG Forecaster report published by shipping consultancy Drewry.
Namely, LNG shipping freight rates continue to be under pressure from weak Asian demand and a growing fleet and shipowners are seen pinning their hopes on a revival in European demand.
Until the recent fall in oil prices, Asian LNG prices were at a premium compared to piped gas prices in Europe.
European traders therefore preferred to re-export cargoes to more profitable Asian markets. This helped to create substantial shipping demand as vessels found employment on both legs of the trade, first in import and then in re-export.
However, as Asian demand has weakened the price differential between Asian LNG and European piped gas has eroded, which has hit re-exports from Europe. Spain, the biggest re-exporter from Europe, shipped 1.3 million tonnes of LNG during the first eight months of the current year, down 40% over the same period last year, Drewry’s data shows.
The recent fall in oil prices has made LNG competitive compared with piped gas, which has the potential to create more demand for LNG in European countries as they seek to diversify their supply base. Nevertheless, according to Drewry, a growing preference for renewable sources of energy and weakening domestic gas consumption will cap any major surge in LNG demand in Europe. Asia will continue to be the main hub for LNG demand and trade.
“Overall, if commodity prices remain low, European LNG re-exports to Asia will stagnate, diminishing employment prospects for LNG vessels, therefore further reducing freight rates,” said Shresth Sharma, Drewry’s lead LNG shipping analyst.
“Additionally, European LNG demand growth will be limited by the region’s access to other competing fuel sources and its sophisticated piped gas infrastructure. We believe European LNG demand will remain modest and Asia LNG imports will continue to be the main driver of global LNG demand growth over the medium-term”, added Sharma.