December 7, 2017
Chinese demand pushed Asian liquefied natural gas prices to a three-year high, as the country’s importers scramble for supplies in the face of Beijing’s move to reduce urban air pollution.
This year’s rally in spot prices of the super-cooled fuel has surprised market executives and analysts, who had long been expecting a subdued market due to extra supplies of LNG from new projects. However, delays in production and China’s “2+26” pro-gas policy, aimed at controlling pollution in Beijing, Tianjin and 26 other cities, has propelled demand.
The Asian spot LNG index Japan-Korea Marker from S&P Global Platts rose to $10.05 per million British thermal units on Thursday, the highest level since December 2014, and a fifth higher since the same time last year.
“The unexpected winner of [China’s] environmental crackdown has been the huge increase in demand for natural gas,” said Daniel Hynes, senior commodity strategist at ANZ.
Chinese imports of LNG have been strong over the past 18 months, stepping up further in the second half of the year, which pushed Asian prices higher. In the first nine months of the year, import volumes rose 30 per cent, while winter demand was up about 40 per cent, according to energy consultants Wood Mackenzie.
Due to the high demand, Chinese companies bought forward imports of contracted amounts of LNG and had to turn to the spot market, pushing up prices, said analysts.
PetroChina, for example, had bought around 70 per cent of its annual contract quantity by September, compared with 50 per cent last year, said Wood Mackenzie. “This means lower contracted offtake is left for the winter, and higher demand for spot,” said Wen Wang, China gas and LNG senior consultant.
The rise in Asian LNG prices comes as gas prices in Europe also increase in anticipation of higher demand in the face of colder weather. In the UK, “pipeline inflows into the country are reportedly stable, but prices are now subject to real and anticipated demand spikes as temperatures hit lower levels,” according to JBC Energy, a Vienna-based consultancy. Spanish prices were also firmer, it added.
Although the spot LNG market could remain tight in the near future, “there are enough downside risks to suggest prices are vulnerable to some weakness over the coming months”, said Mr Hynes.
While Chinese LNG demand is expected to remain strong, steady shipments from delayed projects are expected to come to the market next year. Supplies from a ramp up of Chevron’s Wheatstone and Gorgon projects in Western Australia and exports from several projects in the US are also likely to mean that the LNG glut that has been anticipated will materialise in 2018.