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Charles Kennedy

Charles Kennedy

Charles is a writer for Oilprice.com

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Panama Canal Restrictions Spillover Effect To Hit LNG Trade

  • The Panama Canal authorities recently imposed restrictions on vessel traffic due to a severe drought.
  • As many ships choose to forego passage through the Panama Canal, they must pass through the Suez Canal instead on their way to Asia.
  • This, in turn, might create a shortage of ships to carry the LNG from the United States to Asia via the longer route because it would take each ship longer to reach its destination and return.

The Panama Canal authorities recently imposed restrictions on vessel traffic due to a severe drought that reduced the level of water in the canal significantly.

The restrictions mean that ships carrying cargo through the canal will take significantly longer to reach their destination. The same is true for ships opting for other routes—and this second option is now threatening a spillover that would affect global LNG trade.

As many ships choose to forego passage through the Panama Canal, they must pass through the Suez Canal instead on their way to Asia, a senior executive from a shipping company recently warned. This means that the Suez Canal will have to take a lot more vessels than is normal.

The congestion forcing ships out of the Panama Canal, therefore, will simply move to the Suez Canal. And the Panama Canal is the default chokepoint for U.S. LNG. With congestion there and congestion at the alternative gateway to Asia, LNG cargos are going to take longer to arrive at their destination.

"Suez will need to take a lot more vessels," Sveinung Støhledeputy chief executive of Greek Angelicoussis Group, told Bloomberg. "That means that the waiting time on both ends likely will increase." Related: Why Oil Prices Fell After OPEC+ Announced Deeper Output Cuts

Støhle noted that the Suez Canal has experience in handling increased traffic but added that the potential increase might be quite significant. Normally, a cargo of LNG passes through the Panama Canal every day. Now, with the restrictions, only three to four will be allowed to pass each month. This means the rest would need to take the alternative route through the Suez Canal.

This, in turn, might create a shortage of ships to carry the LNG from the United States to Asia via the longer route because it would take each ship longer to reach its destination and return.

"If you can't go via the Panama Canal, you have to add one more ship for the same volume," Støhle said. "Where do you get the ships from? That's is going to be a challenge."

The first warning signs of looming trouble for the Panama Canal emerged earlier this year when data showed water levels in the Canal were at the lowest since its start of operation in 1914. Traffic was not immediately affected, but the vessels had to reduce their loads by a quarter to be able to pass safely.

Then, earlier this month, the Panama Canal authorities imposed limits on how many vessels could pass through the Canal, with only those with pre-booked slots allowed to proceed. "The recorded precipitation for October has been the lowest on record since 1950 (41% below), and so far, 2023 ranks as the second driest year for the same period," the Canal authority said.

In addition to leading to ship jams, this has also pushed up freight costs, adding to the price tag of U.S. LNG for Asia, as vessels delayed at the Panama Canal become unavailable for use on other trade routes, the EIA warned earlier this month.

Indeed, per a Bloomberg report, the price premium for Asian to European gas deliveries for the summer of 2024 has soared twofold since October. The premium for winter 2024 deliveries has also increased because of the drought-related restrictions at the Panama Canal.

At the same time, some U.S. LNG shippers are opting to send their cargoes to Europe instead of Asia because it's less of a hassle, even if LNG sold in Europe fetches lower prices, Bloomberg again reported, citing S&P Commodity Insights.

"The opportunity to sell more profitably to Asia over Europe from the US depends on your access to Panama Canal slots," Ciaran Roe, global director for LNG, told Bloomberg.

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"If you have these, then your costs may be sufficiently low to send the cargo to Asia more profitably than to Europe for January arrivals, otherwise it's more profitable for cargoes to go to Europe."

By Charles Kennedy for Oilprice.com

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