Plummeted Oil Price Benefits China’s LNG Import
This week’s crude oil meltdown unlocked a better prospect for China’s LNG market. In a short term, China’s LNG buyers will still face the slow recovery progress from the public health event, but the released oil-link long-term LNG price will work together with the later retaliatory LNG demand rally in China to build up a better outlook for LNG import from Q2, 2020.
Last week, Russia refused OPEC to reduce the crude oil production of 1.5 million bbl per day, resulting in continually falling international crude oil prices. As of March 9, the offer for WTI declined by $10.15/bbl to $31.13/bbl, and the offer for Brent fell by $10.91/bbl to $34.36/bbl, hitting the lowest level in the past four years. According to the latest news, the oil price war will continue as both Saudi Arabia and Russia insist to flood the market with low-priced oil, and the extremely weak oil price is expected to last for much longer than estimated.
In recent years, affected by the greatly rising LNG capacity and oversupply in the global LNG market, the international LNG spot price continued decreasing. According to SCI’s statistics, up to March 9, LNG Spot price DES NEA fell to $119/mt. However, China’s imported LNG resources are mainly long-term contracts, and the long-term contracts mainly come with the oil-linked pricing. Meanwhile, as the second-largest LNG importer of the world and the fastest emerging LNG import country, over 75%-80% of China’s LNG import are long-term cargoes. As shown in the chart below, China’s LNG import cost has combined co-movements with the oil-link and spot price, but the oil-link factor triggers a much stronger influence on the import cost than the spot price.
The crude oil meltdown will bring down the oil-link factor in the long-term contract, while the spot LNG price has already dropped to a recorded low level in history. Under the combined influences of the above two factors, it is estimated after a short-term lag caused by the range of oil-link period in the price term, China’s LNG import cost will witness a significant drop sooner later.
The expensive long-term cargoes and high import cost have bothered China’s LNG importers for a long time, and from January 2020, impacted by the warm winter, more-than-sufficient supply from multiple sources, the extremely sluggish demand due to the Spring Festival holiday and the public health event, China’s LNG import seems not capable to afford the high cost anymore. In early February, China’s largest LNG importer CNOOC declared force majeure to multiple long-term LNG suppliers, and in early March, China’s predominant natural gas grid operator CNPC also declared force majeure on LNG import and piped gas import.
But on the long run, China’s public health control has embraced preliminary success, and the national economy recovery progress stepped forward steadily and firmly, resulting in a positive natural gas and LNG consumption reviving. The current LNG inventory level at terminals is high, but on the one hand, China’s national economy planning authority NDRC requested CNPC to reduce the industrial piped gas price to further stimulate the national economy, while CNPC started the underground input right after they announced the end of the winter heating season. On the other hand, the LNG truck loading recovered more than expected. By the second week of March, the LNG terminal truck loading volume has increased by 118% from the lowest level in February, and that CNOOC Tianjin and CNPC Tangshan has returned to the peaking level in last December. Meanwhile, truck loading in South China was less impacted by the public health event and remained above a relatively high level in the past two months.
The retaliatory demand recovery and the flexible import choice will help China LNG import to recover more than expected from the second quarter of 2020. Facing 2020, the end year of the 13th Five-Year Plan, China’s natural gas industry is rushing to the goal of 10% in the energy mix, and China government has made ambitions plans to secure the supply by all means so as to support the rapid growth of natural gas consumption. According to SCI’s estimation, by 2020, China’s natural gas consumption will reach 331.7 bcm, and the LNG import scale will reach 91.9 bcm or 65.6 million tons. In a word, the LNG import of 2020 will slow down from previous years, but the absolute increase will continue significant.
.......
Please click "Read more" for more information
For more information please contact us at
SCI99