By K Raveendran

The deterioration in recent weeks of the security situation in the Red Sea, where Yemen-based Houthi militia in support of Palestine have disrupted global trade by launching drone and missile attacks on vessels, is posing a geopolitical risk to LNG prices.

It has now been more two months since the first attack on a commercial vessel, with indications that the attacks could last at least until the Israel-Gaza conflict is resolved – an essentially uncertain duration. Since mid-January, the US and UK have been drawn into military action in the region, striking Houthi targets inside Yemen.

The US is in a difficult position, balancing relations with Israel while avoiding the conflict spillover over into the wider Middle East region. Recently, the US admitted that Houthi rebels are unlikely to stop their attacks regardless of US action.

For the LNG market, an extended shut-in of the Red Sea route from the Middle East poses a supply risk to although the price impact will be delayed until Europe’s gas storage has been drawn down sufficiently.

In 2023, around 15.5 million tonnes of LNG was sent through the Red Sea from the Middle East to Europe – a crucial 12.9 percent of the continent’s LNG supply last year.

Re-routing vessels through the Cape of Good Hope adds around 12.5 days to the voyage each way at 16 knots – which could require an additional 15-20 vessels to deliver the same volume over the year. This could take the steam off the current bearish pressure on the shipping market, considering spot charter rates have dropped 23 percent across the month.

According to experts with Rystad Energy, it will take an increase in LNG prices before we see an increase in charter rates – more than 70 vessels could be delivered this year, representing fleet growth of more than 10 percent whereas LNG production will only grow 3 percent. They say it is unclear if the prospect of sustained additional voyage time would be acceptable to Qatar, or the prospect of lost canal fees would be acceptable to Egypt. Qatar Energy suspended shipments through the Red Sea from mid-January and has begun rescheduling shipments with European buyers.

Northwest Europe has seen temperatures fluctuate widely in January, with the past two weeks tracking at or below the minimum of the 2019-2023 range. However, even this has failed to support prices, demonstrating the extent of the prevailing bearish sentiment. Further, temperatures are set to bounce up sharply to over 2.5°C above normal in the coming weeks.

The recovery of European industrial gas consumption is also on thin ice. The European Commission reduced its expectations of 2023 gross domestic product (GDP) growth to 0.6 percent in November, with the outlook for manufacturing in 2024 also remaining weak, linked to the impending global economic slowdown. In fact, gas demand recovery now hinges on lower gas prices, with the ongoing risk of disruptions due to events in the Red Sea a net disservice in this regard. Gas consumption in Europe’s power sector has also trended down, dropping 23 percent year-on-year in December due to the material improvement of France’s nuclear power availability as well as higher wind and hydro generation.

Relative to Europe, the impact of the Red Sea disruptions, however, is likely to be limited in Asia. For US LNG going to East Asia, the voyage through the Cape of Good Hope is only four days longer, while for Yamal LNG, the volume is relatively small. Trade optimizations between the Atlantic and Pacific basins could reduce the impact even further.

The outlook for Asia’s industrial demand is also weak, with several Chinese industrial users set to reduce activity until after the Lunar New Year holiday ends on 5 February. By contrast, robust gas purchasing is underway in India and Thailand now that prices have declined to under $9 per MMBtu, including from India’s famously price-sensitive power sector.

The Asian market is characterized by a weakening gas demand outlook in key East Asian markets as the end of winter approaches. Overall temperatures are set to be some 1.5°C above normal which, coupled with a seasonal decline in heating demand, should put downward pressure on prices.LNG inventories in Japan and South Korea ended December at 5.4 Mt and 5.3 Mt respectively, near five-year maximums, weakening the outlook for restocking demand in the shoulder season. (IPA Service)

The post Deterioration In Red Sea Situation Threatens LNG Trade Flows, Drags Prices Down first appeared on Latest India news, analysis and reports on IPA Newspack.