GLM COMMENT: Reality of LNG oversupply looms larger than risk of Hormuz disruption

Author: Patrick Sykes Hal Brown

2020/01/09

LONDON (ICIS)--As the oil price jumped on news of a US strike on Iranian general Qasem Soleimani and the anticipated retaliation, spot LNG prices were falling.

Flare-ups of tensions in the Persian Gulf have long sparked fears that Iran could block the Straits of Hormuz through which the world’s leading LNG exporter Qatar sends its cargoes.

But this time the risk was not enough to discourage the bears from pushing spot prices lower, as rising supply and sluggish demand sustain the status quo of fundamental oversupply.

Market participants are of course watching the situation closely in case of any escalation. But so far the mood is one of wait-and-see, and most are calculating that Iran knows a blockade of the strait would risk its relationship with China, a key ally as US sanctions again limit the Islamic Republic’s trading partners.

Similarly, Iran is unlikely to block shipments from Qatar, one of the few states in the Gulf with whom it enjoys friendly relations.

Shipowners and operators polled by ICIS were cautious but said there was no immediate change to operations.

“Everybody should be concerned, but we haven’t seen any issues for LNG yet. It hasn’t interfered with the LNG flow and I hope it doesn’t,” Awilco LNG CEO Jon Skule Storheill told ICIS.

“But if there’s a real risk of LNG owners on mass deciding not to go to the Gulf, then it’s a supply and demand thing and fewer ships would probably lead to higher freight rates.”

For the moment, charter rates have not reacted to the tensions, with rates for TFDE vessels consistent with recent weeks at around $100,000/day in the Atlantic and $90,000/day in the Pacific.

Oystein Kalleklev, CEO of LNG carrier owner Flex LNG, said: “Shipping lanes are still open.”

He said the company was “continuously” monitoring the situation and currently had no vessels in the area.

Analysts tried to assess potential targets on the water, with most focusing on oil rather than LNG.

“There is an additional threat to vessels carrying US cargoes or assets or are seen to be linked to US economic interests,” said maritime risk consultancy Dryad Global in a note after the Soleimani assassination.

Other companies reiterated statements from last summer, when Iran’s seizure of a British-flagged oil tanker in the Strait of Hormuz caused at least one LNG carrier to divert away from the area.

A spokesman for Anglo-Dutch major Shell said: “We are monitoring the situation closely and expect all vessels we charter to consider applicable industry guidelines and relevant flag state guidance on shipping in the area.”

British major BP said it does not comment on security matters.

Japan-based Mitsui O.S.K. Lines (MOL) said it continued to monitor the situation.

A spokesman for Japan-based NYK Line said the company’s vessels continued to take precautions such as full-speed navigation, but that the latest attack had no direct impact on daily operations.

A spokeswoman for the UK Department for Transport said it “regularly provides security advice to UK and Red Ensign Group Shipping on how they should operate in areas of high risk”.

While the risk of escalation is real, the LNG market is more preoccupied with the reality, as oversupply remains firmly in focus.

As of Thursday, tensions appeared to be easing in the region. Supply appears secure for now.