Rebound in China's trucked LNG prices to $20/MMBtu may curb demand growth

China's trucked LNG prices, for supply from both coastal LNG terminals and inland LNG plants, have surged more than 40% to around $20/MMBtu to date in February as natural gas demand rebounds and seaborne LNG supplies remained suppressed due to high global spot prices.

Domestic demand for natural gas picked up rapidly when companies and factories returned to work after the week-long Lunar New Year that started Jan. 31 and more factories resumed operations after the Lantern Festival on Feb. 15.

China's trucked LNG prices rose to average Yuan 6,535/mt ($1,032/mt) Feb. 17, up from Yuan 4,545/mt Jan. 28, latest data from the Shanghai Petroleum and Natural Gas Exchange showed.

Some LNG terminals even raised their trucked LNG prices to above Yuan 7,000/mt ($20/MMBtu), up nearly Yuan 2,000/mt from end January, according to domestic market sources.

Lower temperatures and snowfall in many regions of China in the past 10 days has boosted consumption of natural gas.

The average temperature across most of China was around 1-4 degrees Celsius below average in the last 10 days, and was expected to remain low for the next 11-20 days, with rain and snow forecast in the country's southern, central, eastern and northern regions, the Central Meteorological Observatory said in a medium-term forecast Feb. 17.

Demand impact

Second-tier natural gas suppliers have begun replenishing their inventories in preparation for stronger demand from industrial users, which enables gas distributors to absorb more imports despite high global prices.

However, the jump in trucked LNG prices could curb downstream demand as domestic gas prices in China have been elevated, with evidence of demand destruction, in several sectors over the past year.

Market sources said the threshold gas price for many industrial consumers in China was around Yuan 6,000-6,500/mt or roughly $18-$19/MMBtu including port fees, and prices above this level would force many industrial users to reduce operations. At least one Beijing-based market participant said that factories can only break even if gas prices fall to around Yuan 6,100-6,200/mt.

Analysts expect energy prices to play a key role in China's plan to boost economic growth this year, especially after fiscal and monetary easing policies by the central bank in recent weeks boosted market sentiment. But COVID-19 related restrictions and any surge in global gas prices remain a risk to growth.

The Platts JKM for April delivery was assessed at $24.301/MMBtu Feb. 17, after surging over $40/MMBtu in December.

Tighter supply

Domestic gas prices are also tight because supply has declined.

First-tier LNG importers resold several LNG cargoes in the global market as spot LNG prices were higher than domestic prices, resulting in fewer cargoes arriving in January and February, according to a trade source in Beijing.

LNG importers are expected to continue reselling cargoes without destination restrictions after ensuring domestic supply due to the large price arbitrage. LNG imported under term contracts costs around $14-$15/MMBtu, while spot LNG prices have been well above $20/MMBtu.

Unipec, the trading arm of state-owned oil and gas major Sinopec, has issued a tender to sell up to 45 LNG cargoes from February to October, while CNOOC has offered up to 10 cargoes for sale in 2022. While only a fraction of these have been sold so far, the Asia-Europe arbitrage has flipped, enabling traders to divert cargoes to Europe.

Some independent LNG terminals like ENN Energy Holdings and Guanghui Energy also sold spot cargoes due to weak downstream demand and low industrial activity in January, S&P Global Platts reported earlier.

The JKM benchmark price for spot LNG deliveries in Northeast Asia averaged $32.84/MMBtu and $24.81/MMBtu for February and March delivery, respectively, on a DES basis, lower than the record high of $35.87/MMBtu averaged for January deliveries, Platts data showed.

LNG imports into China's LNG terminals fell by around 15% in January from December levels, according to shipping data. They are expected fall a further 40% to 4.2-4.3 million mt in February from around 7.2 million mt in January, according to domestic information provider JLC.

Pipeline gas supply from China's biggest natural gas supplier PetroChina has also been slightly lower to date in February, which further tightened supply, according to sources with city gas distributors that mainly buy Central Asia pipeline gas from PetroChina. Central Asian pipeline gas suppliers typically lower supply to China during periods of higher domestic demand during severe winter weather.