Flex LNG Ltd

The majority of the LNG carrier fleet is contracted on long term contracts that link specific exporters to specific importers. This contract structure means that a large part of the LNG shipping business is of a more industrial nature than many other shipping businesses. However, there is also a part of the LNG carrier fleet that is constructed without contract coverage at the time of ordering. These LNG carriers will typically either serve short-term spot trading or fixed on long term contracts.

The spot and short-term contract market is influenced by supply and demand imbalances, and may be volatile. The market spiked in 2011/2012 following the Fukushima disaster in Japan, as all Japanese nuclear power plants were temporarily shut down. This caused the demand for natural gas to increase significantly in Asia and LNG prices increased as well. As a result there was a large price differential for LNG between Europe and Asia and the demand for LNG carriers increased with the flow of LNG from Atlantic to the Pacific. In late 2014 and 2015 the price for crude oil dropped significantly along with a slowdown in the global economy, resulting in the drop in LNG prices in Asia and the closing of the arbitrage between Atlantic and Pacific basin prices. In the period that followed, the market was characterized by an oversupply of LNG tonnage, mainly caused by delays in new LNG capacity coming on stream, particularly in Australia, and the reduced inter-basin trading. This overhang of tonnage caused freight rates to be depressed. In the years from 2017 to 2019, the market witnessed strong growth in LNG production and export capacity, particularly in the US. Global exports were approximately one-third higher in 2019 compared to 2016, which contributed to a more balanced market.

In 2020, despite the addition of 20 million tonnes of liquefaction capacity, the energy sector faced unprecedented challenges due to the COVID-19 pandemic. Lockdown measures drove gas prices to historic lows, significantly impacting energy demand. This situation narrowed the gap between major importing and exporting regions, prompting approximately 189 cargo cancellations from the US and subsequently reducing vessel utilization and freight rates. However, towards the end of 2020 and extending into 2021, Asian gas prices rebounded due to severe weather conditions and supply disruptions in the region, leading to an improvement in freight rates and subsequently in time charter rates. The beginning of 2022 witnessed a notable decline in spot rates as European buyers prioritized inventory replenishment, diverting cargoes that would typically head to Asia to European routes. This coincided with a seasonal downturn in LNG carrier spot rates. Despite these challenges, rates began to recover during the summer season, only to face another setback due to the Freeport outage in June 2022. Nevertheless, from early July onwards, LNG carrier freight rates experienced a resurgence, culminating in new all-time highs of approximately half a million per day in spot rates during the fourth quarter. European LNG imports increased from 83 MT in 2021 to 127 MT in 2022, according to industry statistics. By the end of 2022, long-term charter rates significantly exceeded those of the previous year. Furthermore, the persistently high natural gas prices in Europe, and to some extent in Asia, underscored the substantial opportunity cost associated with the unavailability of shipping capacity.

The winter of 2023 began with mild conditions in Europe and Northeast Asia, which caused a decline in LNG spot charter rates as opportunities for contango trading diminished across basins. Global LNG trade volume grew a modest 3% during the year. The United States had the highest LNG export volumes in 2023, surpassing both Australia and Qatar LNG export volumes, primarily due to the full operational capacity of Freeport LNG in late 2023 and increased output from Calcasieu Pass, whereas Australian and Qatari export volumes remained consistent with 2022 levels. Notably, December marked a significant milestone for global LNG production, reaching approximately 38 million metric tons, the highest recorded to date. China reclaimed its position as the world's largest national LNG importer, with an estimated 74 million metric tons imported in 2023, surpassing Japan. In the second half of 2023, declining gas prices attracted more price-sensitive importers, such as India, Bangladesh, and Thailand, to the LNG market. In 2023, traditional shipping routes faced several inefficiencies. Both the Panama Canal and the Suez Canal experienced reduced traffic, albeit due to different external factors. Reduced traffic through the Panama Canal was attributed to drought and low levels of fresh water supply from the Gatun Lake. Meanwhile, tension in the Middle East effectively closed the Suez Canal for most shipping companies, including those involved in Qatari LNG exports. Towards the end of the year, one- and three-year time charters softened slightly, prompting a pause in many term discussions as charterers sought clarity amidst the impact of new tonnage supply. Meanwhile, short-term rates are currently exhibiting a contango compared to their five- to ten-year counterparts, which remain stable at $95,000-105,000 per day, attributed to high newbuilding prices and relatively elevated long-term interest rates.