February 9, 2022

Spark round trip LNG freight rate turns negative

Negative round trip rates are a clear signal of vessel oversupply in the Atlantic. With the arbitrage likely to favour Europe over the coming months the market could move even lower but a sustained period of below zero rates is unlikely to persist.

Spot freights in the Atlantic dropped to -$750/day according to Spark Commodities, the first time the Spark30 assessment has dipped below zero since the assessment began in 2019.

The Spark assessment includes an assumed fuel cost for the return leg of the voyage, therefore a negative rate implies the shipowner will be covering at least some of the cost of bunkers for that return leg.

Rates have fallen by $286,250/day in just two and a half months. The increase in the Dutch TTF price over the Asian JKM, pushed more US exports into Europe, cutting the average voyage time and significantly increasing fleet supply. As the arbitrage continued to favour Europe, rates have dropped further.

Monthly average Spark30 rate ($000/day) and share of US exports to Europe (*End month share of February exports is not yet available) - Source: Spark Commodities, Kpler

Despite the negative rate, at -$750/day there is still some rationale for owners to fix ships at this level because the hire charter is still positive and will cover other operational costs. This is why, in $/mmbtu terms, rate is still positive at $0.91/mmbtu. Based on the assessed rate at -$750/day, the amount not covered would be $22,000 lump sum. This is $750 x 30 days. To put this in context, using the Spark roundtrip calculator and based on an assumed hire rate of $24,000/day and an LNG price of $26.1 mmbtu the total fuel cost for the ballast leg would be $1,182,591.

The rate assumes a vessel will return to the load port, but if it loads elsewhere and consumes less fuel the voyage will not have been completed at a loss. There are also other operational reasons to fix at a loss. As there is an abundance of vessels, the potential for a long delay between loads means either the tanks will warm or the owner will bear the cost of cooling them. By continuing to take cargoes and maintain a heel of LNG in the ship, tanks remain cool. In addition, some vessels are operated as re-lets and therefore may be able to fix at lower rates than the rest of the market.

While there are reasons for fixing below zero, for the majority of the fleet it will be unsustainable to maintain and the market will find a floor before rising. Negative rates for the LNG market is a new phenomenon, so predicting where the market will bottom out is an unknown.

Any further downward movement in rates will send a clear signal to owners that the region is oversupplied, pushing vessels into the Pacific. The Pacific Spark25 rate is currently trading at $16,250/day, $17,000/day above the Atlantic rate. This will likely depress Spark25 market but allow Spark30 to recover.

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