Oil & Gas

The global LNG market has grown increasingly fragile, with price spikes becoming more likely due to imbalances between supply and demand. The market's fragmentation, driven by Houthi strikes on Western shipping routes, has added significant risk. Since February, no LNG traffic has passed through the Bab el Mandeb strait, leading to longer, costlier journeys as vessels are rerouted around Africa or to alternative destinations.

Analysts agree that these rerouted journeys are increasing costs and causing delays, with LNG carriers being no exception. The supply of LNG carriers has tightened due to longer routes, causing market fragmentation. Currently, Qatari LNG primarily goes to Asia, Russian LNG to Europe, and U.S. LNG to both regions. A supply outage now would have more severe impacts on the market than before.

Cargo swapping has become the new norm, with U.S. producers sending LNG to Europe while purchasing other cargos, likely from the Middle East, for their Asian clients. This strategy has emerged as a response to persistent Houthi attacks on Red Sea shipping routes. Although the situation is currently manageable, rising demand, particularly in the northern hemisphere's summer, might necessitate more cargo swapping and potentially higher prices.

China, the world's largest LNG buyer, is expected to see record imports again this year, with significant increases predicted. Meanwhile, EU sanctions on Russia's LNG industry could disrupt supply chains, making it harder for Novatek to send cargoes to Asia. This could result in more Russian LNG remaining in Europe and less reaching India and China, unless more cargo swaps occur. The LNG market is likely to remain fragmented or segmented for several more months, with supply security becoming increasingly challenging due to frequent production outages in major LNG projects.