- The LNG shipping industry has built excessive capacity in anticipation of increased LNG exports, resulting in a current oversupply of ships and plummeting charter rates.
- Political factors, such as the U.S. pause on new LNG export licenses and shifting trade dynamics, have contributed to slower than expected growth in LNG supply in 2024.
- Despite current losses and market imbalances, the LNG shipping sector anticipates a future upturn driven by increasing demand from various regions and evolving global trade patterns.
Outlooks for liquefied natural gas markets have been extremely bullish in recent months thanks to the one-two punch of Europe’s open-arms embrace of any form of fuel that can’t be traced back to the Kremlin and the United States’ new petro-philic administration change. But while projections for the back half of 2025 are looking good for the LNG sector, increases in the market have not materialized.
In fact, in 2024, the global supply of liquefied natural gas grew just 2.5 percent, a surprisingly humble trend compared to previous years. This is in part because of an LNG export pause enacted by the Biden administration. On January 26th of last year, then-President Biden announced that the U.S. would pause approvals of new licenses to export LNG to give the Department of Energy the opportunity to review and assess whether LNG exports are “undermining domestic energy security, raising consumer costs and damaging the environment.”
But the shipping industry has wasted no time building new vessels to transport all of the LNG that they anticipate will flow around the western world in the coming months. Trump has been loud and clear about his intentions to not only overturn the Biden-era LNG pause, but to reinstate a drill-baby-drill approach to U.S. energy policy. However, it would appear that the shipping sector has gotten way ahead of itself, adding too much capacity to its seafaring LNG fleet too soon and thereby leaving a glut of LNG shifts to “drift in a sea of red ink” according to recent reporting from the Financial Times.
“Spot charter rates in the Atlantic have plummeted more than 90 per cent since November to $4,000 a day, causing them to spring a leak,” the Financial Times wrote this week. Weak growth in the LNG sector over the course of 2024 coupled with a speculation-fueled shipbuilding frenzy has led to a massive glut in shipping capacities, with additional seaborne capacity outpacing actual LNG production growth by more than two-thirds.
A complex combination of political and economic factors have led to lots of stalled LNG projects in recent months, and the United States has been ramping up LNG shipments to Europe rather than shipping LNG all the way to Asia. So far this has mostly been due to price differentials, but could soon be greatly exacerbated by a trade war between the United States and China. While strengthening LNG trade in the West makes good economic sense for both the U.S. and its European allies, it’s taking a bite out of more costly, and therefore more lucrative, trans-Pacific shipping operations.
Building new ships takes a lot longer than producing LNG, meaning that occasional losses of this sort are an inevitability. The shipping sector has no choice but to build according to far-out projections that may or may not materialize. So while the bottom line for this quarter has been devastating for many companies, it’s not without precedent or contingency.
“The resulting losses are painful for ship operators, but not permanent,” reports FT. “For plenty of ship owners, this is water off a duck’s back: charter rates are set in advance and only a minority are struck at the spot rate. Besides, they know it is a question of when, not if, the cycle turns.”
While the United States and Europe are major players in global LNG markets, there are plenty of other actors who will soon require increasing shipping services for their own LNG trade. The small but oil- and gas-rich South American countries of Guyana and Suriname are poised for a coming export boom, and their locations and policy approaches incentivize export to Asian buyers. Mexico and Canada, too, have recently expanded their own LNG sectors, with Mexico potentially on track to surpass Canadian exports in the years to come.
By Haley Zaremba for Oilprice.com
Energy News Beat