China May Experience Larger Seasonal Swings in LNG Prices

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Chinese government agencies converted tens of thousands of homes and factories from burning coal to natural gas since the end of last year. Beijing’s crackdown on pollution has an immediate effect on cleaner skies, and has put China on track to surpass Japan as the world’s largest importer of natural gas. However, China’s surging winter heating needs will aggravate larger summer-winter price swings in the global liquefied natural gas (LNG) market.

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Due to the new quest for less urban air pollution, China’s LNG imports rose by 48 percent over the first 10 months, pushing Asian LNG prices to a three-year high. The Asian spot LNG index Japan-Korea Marker from S&P Global Platts jumped to $10.05 per million British thermal units (mmBtu) on Jan 25th, the top level since December 2014, making LNG one of 2018’s most promising commodities.

The bullish price of LNG is primarily boosted by China’s surging demand for natural gas in frigid northern areas, and this winter peak is even higher than what is was in previous years. But what will happen in this summer, the lull season for heating needs?

  • Upcoming Risks

  1. China’s seasonal demand for LNG

If the previous pattern is followed, a 40 percent drop in imports from December to the seasonal low of 2018 would lead to approximately 3.1 million tonnes as the lowest monthly volume for the year. This may be good news for traders and energy companies who can access tankers and uncommitted supply, as per Kerry-Anne Shanks, a senior analyst at Wood Mackaenzie.

With heating demand going down after winter and tepid manufacturing growth anticipated in 2018, it is likely that the fall from winter peak to summer trough may be larger than before in China’s LNG market. The new and present policy has stirred up a strong wave for demand for natural gas, used to replace dirtier coal for household heating. Without policy incentives in summer, the demand wave will thud heavily onto the ground.

  1. Cut-off gas supply

At the same time, eased supply will continue to force down LNG price in summer, as a flood of gas export projects are under construction in Australia, Russia and the United States in the coming year. In Australia, Gorgon LNG, Wheatstone LNG, Ichthys LNG and Shell’s floating LNG (FLNG) project Prelude have added about 37 million tonnes per year (mta) to global capacity by the end of last year. In Russia, Novatek Microelectronics Corp. has been in the process of activating a $27 billion LNG project in December 2017. In the United States, Dominion Cove Point LNG is about to be commissioned earlier this year.

Combined with the slower demand growth, summer spot prices might well drop low enough that some factories have to curtail production, according to Kittithat Promthaveepong, a gas analyst with industry consultant FGE in Singapore.

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  • Final Thoughts

On the bright side, LNG demand in Asia, except for the big three of China,Japan and South Korea, has been increasing and could suck up soaring supply coming to market. But a tsunami of new LNG revolution is on the way without doubt.

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