Red Sea tensions spark Italian LNG buying interest: sources

Tensions in the Red Sea have sparked an uptick in buying interest in Italy for LNG as potential cargo delays push Italian buyers to eye alternate supply sources, sources said.

"Despite the steady decline in spot charter rates since the onset of this turmoil in the Red Sea, the recent escalation and rerouting of Qatari cargoes could result in rates reversing course," Domitille Lainey and Mehrun Etebari, Associate Directors and Andres Rojas, Director, at S&P Global Commodity Insights said.

"In order to maintain current Qatari export levels to the European market without the use of the Suez Canal, the Qataris would have to rely on the spot tanker market to bring in additional tonnage to support their trading activities."

The S&P Global analysts said that if the crisis were protracted, arranging swaps or rerouting Europe-bound cargoes will be a heavy undertaking for Qatar given the scale -- it sent 15.6 million mt of LNG to Europe via Suez last year. However, the share of its output that has gone to Europe has declined since the peak of the European gas crisis in 2022. In both Q2 and Q3 2022, Qatar exported over 27% of its LNG to Europe.

By Q4 2023, this share had dropped to 16%, both due to weakened demand from Europe that had removed price signals incentivizing the routing of flexible volumes west of Suez and due to the onset of several new fixed supply contracts with Asian buyers that have limited Qatar's flexible volumes.

The majority of these deliveries come via Qatar's firm long-term contracts with European buyers, led by Edison in Italy.

Italian energy company Edison has a long-term contract to purchase LNG from QatarEnergy, formerly Qatargas. Under the 25-year contract, Edison imports about 6.5 Bcm/year LNG to Italy through Italy's offshore regasification terminal in Rovigo.

Three cargoes were sent under long-term contracts from Qatar to Europe so far in 2024 while Italy took one of those.

The total contracted volume of Qatari LNG exports into Europe had dropped 24% to 14.1 million mt in 2023 despite the absence of Russian pipeline gas.

Currently, Italian imports of LNG in January stood at 720,000 mt as of Jan. 22, according to data from S&P Global. This was at around 73% of the levels seen last month with sources expecting imports into Italy this month to overtake the levels seen in the previous month.

Of the current total, 50% was from the US, while around 39% was arriving from Qatar. The remaining volumes were arriving from Algeria and Egypt.

Sources suggest that buying interest for January would overtake December and blips of buying were already being seen for February and March.

Italian bids for LNG in March and April were heard at around an 80 cents/MMBtu discount to TTF.

Platts, a part of S&P Global, assessed the DES Mediterranean Marker for March was assessed at $8.307/MMBtu Jan. 19, up 2.6 cents/MMBtu on the day and at a discount of 75 cents/MMBtu to the March TTF hub futures price.