Global economic recovery is gradually taking shape as the spread of the coronavirus is slowing in most countries due to summer weather and rapid vaccination in industrialized countries. China was the first country to enter a lockdown in February 2020 and also the first to restart the economy. Rapid economic expansion is driving the need for raw materials such as LNG. As China’s summer heating season is starting, expect more difficulties in an already tight market.
Chinese imports of LNG have seen a remarkable rebound during the past couple of months. Companies on the mainland imported 6.73 megatonnes in April alone which was the second-fastest annual growth since April 2019 and the third-biggest monthly volume ever. As inventories are being refilled and demand is set to soar due to warmer weather, imports are likely to increase.
According to Robert Sims, head of LNG short-term, gas and LNG research at consultancy Wood Mackenzie, “China is where much of the growth is currently materializing, with coal-to-gas switching policies gathering pace, resulting in a demand surge of 2.2 million tonnes since the beginning of the year, 8 percent more than in 2020. We expect this strong growth to continue as domestic production growth continues to lag behind domestic demand growth.”
Another factor that is continuously driving demand for natural gas is the merger of the pipeline systems of CNOOC, China National Petroleum, and Sinopec into the National Oil and Gas Pipeline Network Group. Improved efficiency will lead to lower prices and faster extension of the gas grid. The merger is expected to fuel expansion by 80 percent to 240,000 kilometers by 2025.
Furthermore, colder than usual winter weather has drained storages on the mainland which need to be refilled ahead of the next heating seasons. This means an additional 11 bcm on top of meeting short-term demand. Also, seven new facilities are being commissioned in the next couple of months which will increase the storage capacity by 3 bcm.
While China is the main source of growth for LNG demand, in the short term Europe will add more pressure on an already heated market. As with Asia, Europe experienced an extended period of cold weather the previous winter which drained the continent’s extensive storage capacity. Currently, natural gas is traded for $9/mmBtu on the TTF benchmark, a level not seen since mid-2018.
Robert Sims again: “…the key dynamic for the price surge has been the strengthening economics of coal-to-gas switching. Since November last year, carbon prices and coal prices have increased by 33 and 26 percent respectively, which alone have pushed European TTF gas prices up by $3/mmBtu. Winter will see market dynamics getting increasingly tighter. Lower winter starting inventory in Europe, combined with high seasonal Asian demand, will result in increased competition for LNG.”
European markets could be somewhat shielded from extreme price fluctuations on the global LNG market due to improved connectivity with Russia. The highly contentious Nord Stream 2 pipeline is scheduled for completion in 2021. According to President Putin, the first of two sections is already finished.
However, export issues in at least Nigeria, Peru, Indonesia, Malaysia, and Australia are creating additional problems. Reduced supply is contributing to the tight market in a phase of the global economic recovery after the pandemic which needs cheap raw materials. The adverse effects already show in prices where costs for LNG have risen by $0.50 to $10.15/mmBtu in one week in Asia.
While LNG provides much-needed flexibility to markets, extreme price fluctuations increase the incentive to insulate the economy somewhat by improving pipeline connectivity. Europe enjoys an unusually high level of connectivity with producers and is spared the worst of the LNG market. China is in a comparable position as the country imports from both Central Asia and Russia through pipelines with ongoing talks with Moscow for another massive project more to the west. Of the current large importers, South Korea and Japan have the least options. For these large countries, long-term contracts with suppliers could insulate them from the worst price swings.
By Vanand Meliksetian for Oilprice.com
More Top Reads From Oilprice.com:
