Cold weather and a scramble to secure natural gas supplies in Asia are impacting more than only power generators, as spot prices for trucked liquefied natural gas (LNG) in China skyrocketed last month, according to Wood Mackenzie.
The consultancy said spot prices in the LNG transport space nearly doubled in only three weeks in the Hebei, southern Jiangsu and southern Guangdong regions. According to delivered price indices, trucked LNG peaked at $28.00/MMBtu on Dec. 21 in the Hebei and Jiangsu regions. Prices then dropped sharply and increased with another cold snap in late December, Wood Mackenzie said.
China has worked to increase domestic natural gas production and implement more flexibility on the demand side following shortages in recent years, establishing seasonal pricing, winter gas contracts and interruptible demand, Wood Mackenzie added. The national oil companies also said heading into the winter that the country would be well stocked with natural gas supplies, but a perfect storm in Asia was building starting in late November, leaving the gas market stretched.
“The price spike came as a huge surprise to market participants,” said Wood Mackenzie research director Miaoru Huang. “Before winter started, consensus was that there would be a well supplied market with subdued trucked LNG prices, as was the case for most of 2020. As a result, trucked LNG supply had been tightened to make room for piped gas in the current winter season.”
Winter gas demand has increased due to a strong economic recovery following the outbreak of Covid-19 in China. Continuing coal-to-gas switching among residential users and extremely cold weather this winter, where temperatures have dropped to some of their lowest in decades, also have contributed to the rise. Finally, logistical issues contributed to the spike as roads were frozen and an import terminal in southern China was knocked offline until late December after a fire.
Wood Mackenzie said LNG makes up less than 20% of China’s gas demand each year. However, the firm said prices are highly sensitive to market balance, especially during the winter.
Most LNG sales still are tied to oil-linked contracts throughout Asia, but shipping constraints, severe cold and recent LNG production outages across the world have left buyers scrambling for incremental supplies on short notice. The market has reached a historically tight point pushing LNG spot prices above $30, while the February Japan Korea Marker futures contract is near $20.
Huang said city gas distributors and small industrial and transport end-users were most affected by the trucked LNG price spike.
“Upstream suppliers’ top priority is to safeguard residential and space heating demand,” she said. “Non-prioritized users faced piped gas cuts at short notice. As demand was sluggish before winter, city gas distributors did not ask upstream suppliers for enough additional supply in winter piped gas contracts. As a result, some of them were caught by the sudden demand surge and had to resort to trucked LNG.”
Warmer weather and less snowfall is expected across North Asia in the second half of January, while importing LNG also is expected to be less challenging as shipping constraints ease, making it easier to get cargoes to buyers later in February and March.
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