Red Sea tension could affect Europe’s LNG deliveries, experts say

LNG shippers from the US and Qatar may need to opt for longer routes to avoid the Suez Canal

A floating storage regasification ship at the northern German North Sea port town of Wilhelmshaven. Reuters
Powered by automated translation

Live updates: Follow the latest news on Israel-Gaza

Tension in the Red Sea could have a significant impact on Europe’s liquefied natural gas (LNG) deliveries, but as of now, the effect on gas prices has been muted.

This week, oil prices have surged by about 3 per cent after the suspension of operations in the Red Sea by some of the world’s largest shipping companies, in response to attacks by Yemeni Houthi rebels.

However, European gas prices have continued to decline on high storage levels and lower demand after a brief increase earlier this week.

The Dutch Title Transfer Facility gas futures contract, the benchmark for Europe, was last trading at €33.52 ($36.70) a megawatt hour on Thursday after declining by more than 61 per cent this year.

The Red Sea is an important waterway that all vessels passing through the Suez Canal must transit.

The Suez Canal is a major artery for global trade, with significant LNG exports through the canal mainly consisting of deliveries from Qatar to Europe and exports from the US and Russia to Asia.

Last year, Qatar's LNG trade with Europe through the canal stood at 19.84 million tonnes, ahead of the second-largest trade flow from the US, according to Rystad Energy data.

This year, the Gulf country has exported 13.74 million tonnes of LNG to the continent so far.

Sending Qatari ships to Europe via the Cape of Good Hope, off Southern Africa, would mean extending the travel time by about 17 days, doubling the current duration of the voyage, Lu Pang, senior analyst at Rystad Energy said.

“If Qatari LNG cargoes to Europe are disrupted in the Red Sea, additional shipping capacity may be required to cover the additional voyage duration,” Mr Pang said.

“Depending on contract clauses and negotiations, arranging for European LNG deliveries through other methods may become feasible.”

Europe's delivered imports of LNG in December rose by 2.59 million metric tonnes last week to 7.04 million metric tonnes on December 18, according to S&P Global Commodity Insights.

Europe’s LNG imports hit a record high last year as Russia reduced its exports to the continent following its invasion of Ukraine.

However, demand this year has been weak due to a warmer-than-expected winter and high storage levels.

In early November, Europe’s underground gasfields, where the fuel is stored for consumption during peak demand in cold weather, were 98 per cent full.

Since then, levels have fallen by only 10 per cent to 88 per cent, well north of their five-year averages, MUFG, Japan’s largest lender, said in a research note on Thursday.

“A strong El Nino can also play havoc with global temperatures but, so far, the outcome seems to be warmer weather,” said Ehsan Khoman, head of commodities, ESG and emerging markets research at MUFG.

“At the current juncture, though, even with a slightly faster pace of drawdown, Europe’s energy security again seems to be on good footing to see through the winter.”

MUFG also said the current sell-off in European gas prices was “a tad extreme”, given that lower prices have incentivised more coal-to-gas switching throughout the year.

It will probably take until the 2025-26 winter, when the next global LNG supply wave is fully under way, for European balances to not necessarily require storage levels above 90 per cent at the beginning of the heating season, the bank said.

US exports

If the situation escalates in the Red Sea, shippers transporting LNG from the US to Asia and other markets might need to consider using the Cape of Good Hope route.

The Panama Canal has traditionally been the more popular route, as vessels take an average of only 30 days to travel to East Asia.

However, the current drought in the Central American country has limited the number of transits per day.

Last year, the US exported 6.41 million tonnes of LNG through the Suez Canal, compared with 10.84 million tonnes through the Panama Canal, according to Rystad Energy.

A voyage from the US to East Asia through the Suez Canal takes about 39 days to complete, compared with 42 days via the Cape of Good Hope, the consultancy said, citing its vessel-tracking data.

Updated: December 21, 2023, 9:42 AM