The Iran-backed Houthi militants target ships passing through the Bab-al-Mandab Strait and the Red Sea, forcing LNGCs to change their course. The security concerns threaten Middle Eastern LNG exports to Europe and US exports to Asia, also triggering a spike in natural gas prices. The prolongation of attacks will likely derail Suez transits, making COGH the only viable, but costlier shipping route
The increasing attacks carried out by Houthi militants in the Red Sea are creating ripples in the shipping industry. After containers and tankers, LNGCs have been compelled to change their initial course by moving away from the Suez Canal and taking longer diversions via the Cape of Good Hope (COGH).
According to Drewry AIS, five LNGCs (including three laden and two ballast) have diverted from the Suez Canal so far. Three of Celsius’ LNGCs (Copenhagen, Charlotte, Geneva) – two chartered by Gunvor have been re-routed since last week. Of which, Celsius Copenhagen is deemed to be carrying LNG from the US Freeport LNG terminal to South Korea while the new destination remains indecipherable.
LNG exports are under threat albeit winter demand lingers
As per Drewry AIS, 70% of the US exports have headed towards Europe while 25% to Asia and 5% to South America in 2023. Meanwhile, Qatari exports to Asia have accounted for 78% with Europe commanding 22% this year. Although LNG shipping has remained insulated from the increasing restrictions in the Panama Canal owing to the shift in trading patterns (with the US mainly sending shipments to Europe while the Middle East and other major exporters serving Asian demand), the ongoing concerns over the Suez Canal becoming a perilous passage for ships has begun creating havoc in the LNG market.
Drewry believes that the continuation of Houthi attacks in the Red Sea could disrupt the LNG shipments via the Suez Canal as it remains a popular and preferred passage for shipments reaching Asia from the Middle East and the US. From January to November 2023, Suez Canal recorded 50% of the LNGC transits followed by COGH (28%) and Panama (22%).
Suez Canal remains a crucial passage for Qatar as about 15% of the Qatari LNG cargoes move towards Europe through Suez, making 5-6% of total European gas supplies. As a result, the current diversions have instigated a spike in gas prices, with TTF jumping by 7% in a day.
Drewry believes high storage in Europe and subdued demand from Asia will insulate the market in the short term but can have a significant impact if the situation develops further, especially with the Panama Canal restrictions in place.
In response to the recent attacks, the Panama Port Authority (ACP) announced an increase in daily transits to 24 from the existing 22 which would mildly aid the delays around the Panama Canal. However, currently, the Suez Canal holds more importance for the LNG market compared to the one in Panama and can impact the Middle Eastern LNG exports to the Atlantic basin.
LNG shipping likely to gain momentum
The longer diversions of shipments via COGH in case of prolonged attacks in the Red Sea could generate extra tonne-mile demand, as re-routing of Qatari shipments (Ras Laffan) to Europe (ARA) from Suez to COGH would increase sailing time by around 80% from 15 to 27 days. This would also translate into higher shipping costs and longer deployment of vessels.
The Red Sea attacks could trigger a jump in LNGC rates, due to the longer voyages and the rise in war risk premiums. Shipping rates for a TFDE carrier are currently around $120,000 pd, down by 32% YoY due to high inventory and tepid demand but brokers expect the rates to jump from next week.
Source: Drewry