Red Sea Disruptions Fragment LNG Trade, Shift Supply Routes

Red Sea conflict disrupts global LNG routes, increasing shipping costs and fragmenting the market.

By Mackenzie Crow

5/15, 23:31 EDT
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Key Takeaway

  • Red Sea disruptions have halted LNG tanker traffic, forcing reroutes around Africa and fragmenting global LNG trade.
  • The shift has increased shipping costs by 4%, impacting global demand for oil and gas transport.
  • Europe and Asia are adjusting to new supply patterns, with more Qatari LNG going to Asia and Russian LNG to Europe.

Global LNG Trade Disrupted

The global liquefied natural gas (LNG) trade has faced significant disruptions due to violent attacks by Yemen’s Houthi rebels in the Bab al-Mandab Strait, a critical passage separating the Arabian Peninsula and Africa. This has halted the passage of LNG tankers through the strait for four months, a route that dozens of ships used to traverse each month before the escalation of the Israel-Gaza war. The forced rerouting of vessels around Africa to transport fuel between the Atlantic and Pacific basins has led to increased shipping costs and a fragmented global LNG market.

Patrick Dugas, head of LNG trading at TotalEnergies SE, highlighted the economic challenges and cargo segmentation resulting from these disruptions. The industry is adapting by finding homes for shipments closer to their production sites and engaging in cargo swaps to manage transportation costs and meet contractual obligations.

Shifts in LNG Supply Routes

The conflict has prompted significant shifts in LNG supply routes, with more Qatari LNG being directed to Asia and an increase in Russian LNG flowing into Europe. This change is a response to the longer travel distances now required, which have tied up shipping availability and added approximately 4% to the global demand for shipping oil products and gas. The Suez Canal, previously accounting for about a tenth of global seaborne trade and offering Qatar the shortest route to Europe, is now less viable for LNG transport.

Moreover, crossings via the Panama Canal have decreased due to an unprecedented drought, further complicating US LNG shipments to Asia. According to Clarkson Research Services, these longer routes are expected to strain shipping resources, despite a current comfortable supply situation in markets like Europe, which recently experienced a mild winter and reduced industrial fuel consumption.

Market Adaptations and Future Outlook

The LNG market is adapting through strategic cargo swaps and rerouting, with traders optimizing shipments based on production proximity and contractual needs. For instance, US LNG is being redirected to Europe, while equivalent supplies are sourced in Asia to fulfill specific buyer requirements. This logistical maneuvering is crucial as the industry braces for increased fuel demand and potentially higher shipping costs in the lead-up to next winter.

Despite the disruptions and increased shipping distances, the daily cost of chartering a tanker has shown resilience, even declining since the escalation of tensions in the Red Sea. This reflects the current supply-demand balance in the LNG market, particularly in Europe. However, industry experts like Per-Christian Willoch Fett, director and global head of LNG at Fearnleys AS, caution that the real test will come as demand ramps up in the autumn, potentially challenging the market's ability to adapt to these new logistical hurdles.

Street Views

  • Patrick Dugas, TotalEnergies SE (Neutral on the global LNG market):

    "At the moment, more than ever, you have cargo segmentation of the two basins, and it will be more challenging economically to move a cargo from one basin to another."

  • Per-Christian Willoch Fett, Fearnleys AS (Cautiously Optimistic on LNG shipping costs):

    "It is, however, what we call the ‘shoulder month period’ in LNG, with low gas and ship demand... Let’s see how things go when we get towards the ramp up period towards the autumn."