The global economic recovery is gradually taking shape as the spread of the coronavirus slows in most countries due to summer weather conditions and rapid vaccination in industrialized countries. China was the first country to enter lockdown in February 2020 and also the first to restart the economy. Rapid economic expansion drives the need for raw materials such as LNG. As China’s summer heating season begins, expect more trouble in an already tight market.
Chinese LNG imports have experienced a remarkable rebound in the past two months. Businesses on the continent imported 6.73 megatonnes in April alone, the second fastest annual growth since April 2019 and the third highest monthly volume on record. As stocks rebuild and demand is expected to skyrocket due to the warmer weather, imports are expected to increase.
Robert Sims, head of short-term LNG, gas and LNG research at consulting firm Wood Mackenzie, âChina is where much of the growth is materializing right now, with accelerating policies to transition from coal to gas, resulting in an increase in demand of 2.2 million tonnes at the start of the year, 8% more than in 2020. We expect this strong growth to continue as the growth in the domestic production continues to lag behind domestic demand growth. “
Another factor that continually drives demand for natural gas is the merger of the pipeline networks 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 expansion of the gas network. The merger should fuel 80% expansion to 240,000 kilometers by 2025.
In addition, a colder than usual winter has emptied the storages on the continent which must be filled before the next heating seasons. This means an additional 11 bcm in addition to meeting short-term demand. Too, seven new installations will be put into service in the coming months, which will increase the storage capacity by 3 billion cubic meters.
While China is the main source of growth in LNG demand, in the near term, Europe will add more pressure on an already heated market. As in Asia, Europe experienced a long period of cold the previous winter which exhausted the continent’s vast storage capacity. Currently, natural gas is trading at $ 9 / mmBtu on the Reference TTF, a level never seen since mid-2018.
Robert Sims again: ââ¦ The key dynamic of the surge in prices was the strengthening of the economy from the switch from coal to gas. Since November of last year, carbon prices and coal prices have increased 33% and 26% respectively, which alone has pushed up TTF gas prices in Europe by $ 3 / mmBtu. Winter will see market dynamics tighten more and more. Lower winter starting stocks in Europe, combined with high seasonal Asian demand, will lead to increased competition for LNG. “
European markets may be somewhat shielded from extreme price fluctuations in the global LNG market due to improved connectivity with Russia. The controversial Nord Stream 2 pipeline is expected to be completed in 2021. According to President Putin, the first of the two sections has already been completed.
However, export problems at least in Nigeria, Peru, Indonesia, Malaysia and Australia create additional problems. The reduction in supply contributes to the tightening of the market in a phase of global economic recovery after the pandemic which needs cheap raw materials. The negative effects are already showing in prices where LNG costs have risen from $ 0.50 to $ 10.15 / mmBtu in one week in Asia.
While LNG provides much-needed flexibility to markets, extreme price swings increase the incentive to somewhat isolate the economy by improving pipeline connectivity. Europe enjoys an exceptionally high level of connectivity with producers and escapes the worst of the LNG market. China is in a comparable position as the country imports from both Central Asia and Russia via pipelines with talks underway with Moscow for another massive project further west. Among the current large importers, South Korea and Japan have the fewest options. For these large countries, long-term contracts with suppliers could protect them from the worst price fluctuations.
By Vanand Meliksetian for Oil Octobers
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