Analysis: Cheaper oil-linked LNG unlikely to accelerate China's gas demand recovery

Cheaper LNG contracts, after this week's oil meltdown, are unlikely to accelerate China's LNG demand recovery, as the world's second largest importer continues to struggle with the coronavirus disruption and high gas inventories after a mild winter.

This means CNOOC and Petrochina are unlikely to change their force majeure plans, despite a gradual uptick in downstream gas consumption from utilities and manufacturing hubs, traders said.

Growth in China's natural gas imports, including piped gas and LNG, slowed to 2.8% over January-February from 18.5% a year ago as the coronavirus outbreak exacerbated a demand slowdown caused by a warm winter, customs data showed over the weekend.

According to data from CNPC's Economics & Technology Research Institute, China's LNG import over January-February actually declined by 3.5% compared with a growth rate of 19.7% a year ago.

On Monday, crude oil prices fell by nearly 30% in its sharpest decline since the 1991 Gulf War, bringing contracted LNG prices closer to spot LNG prices, which were already trending at record lows of under $3/MMBtu last month.

But the extent to which low prices can stimulate imports is limited, and whether Chinese LNG buyers return to the spot market en masse depends on their spare storage capacity, traders said. A source with state-run CNOOC said scarcity of storage made it difficult for them to buy spot cargoes, adding that Sinopec enjoyed more flexibility as it had access to underground storage.

Even at $4/MMBtu -- Platts JKM was at $3.29/MMBtu on Tuesday -- spot LNG cargoes would still be cheaper than oil-indexed term supplies after crude fell below $35/b, and some private gas importers are mulling spot purchases.

China's Jovo Group, which sells almost half of its oil-linked LNG imports via truck, said it is now reconsidering its plans to defer contracted volumes and buy more spot, following the drop in oil prices.

"What if the crude price rebounds later?" a Jovo executive said, adding that the oil price decline will be reflected in May-delivery cargoes.

The independent importer sold around 40 trucks/day of LNG in the domestic market last week, accounting for around 40%-50% of its normal sales, the company source said.

FORCE MAJEURE

The oil price collapse has also raised questions over whether state-run Petrochina's plans to declare force majeure on LNG and pipeline contracts would be impacted.

Last week, Petrochina issued an advance notice to its suppliers saying it planned to declare force majeure on its contracted LNG and pipeline gas supply due to low demand, market sources said. A source with Petrochina confirmed it was preparing a force majeure claim.

Petrochina's force majeure plans are based on the company's inability to accept gas due to the coronavirus epidemic, so they are unlikely to change due to lower LNG contract prices, a source with another LNG importer said.

Meanwhile, Petrochina has been active in the spot market and bought a cargo via the Platts Market on Close assessment process at end-February from Vitol for April delivery at $3.05/MMBtu. Previously, suppliers had objected to CNOOC's force majeure saying the company was reneging on term contracts in favor of cheaper spot volumes.

S&P Global Platts Analytics said the timing of the force majeure was surprising as Petrochina's LNG imports have been gradually picking up and could potentially displace some of the more expensive oil-linked pipeline gas supplies.

"Inexpensive spot LNG could help backfill the targeted volumes, especially from Myanmar, which are generally delivered at over three times where JKM is currently trading," it said.

GAS DEMAND REBOUND

Meanwhile, China's domestic gas demand has shown signs of recovery, with factories in the manufacturing hubs of Guangdong and Zhejiang expected to rebound faster than the rest of the country. Gas demand at utilities could rebound to around 50%-60% in early March from as low as 10% at the peak of the outbreak, officials at gas utilities said.

For instance, electricity producer Guangdong Energy Group's LNG-fired power plants were operating at 60%-70% of capacity, up from around 40% in early February, according to a company executive. It plans to issue a tender for spot LNG cargoes on a fixed price basis, and is also in talks for a long-term contract, the source said, but declined to elaborate.

At the Guangdong Dapeng LNG import terminal, in which Guangdong Energy Group has a 6% stake, gas inventories were still high and these will need to be drawn down first, the source said. Several LNG vessels were floating outside receiving terminals last month waiting to unload.

Natural gas distributor Foshan Gas' sales had recovered to around 50%-60% of normal levels since end-Feb, an executive said, adding that more factories in Guangdong province have resumed operations this week. "We expect to see further recovery in industrial demand this month," he added.

Industrial gas accounts for 80% of Foshan Gas' total gas sales and the remaining 20% comes from city gas, according to the source. It mainly sources supply from pipeline gas and sold 2.2 billion cu m of gas in 2019, he added.