China's winter heating season begins, gas demand suppressed

Large-scale centralized district heating in northern China has officially begun, with Beijing starting heating Nov. 15, according to state media Xinhua News Agency, but market sources suggest the forecast temperatures of 5-15 C in Beijing on the day imply a mild weather overall so far this winter, significantly suppressing gas demand from residential users.

The impact of mild temperatures on gas demand was evident in the pipeline gas auction held by state-owned PetroChina at the Chongqing Petroleum and Natural Gas Exchange Nov. 14, sources said.

PetroChina sells its uncontracted pipeline gas to domestic players through the auction mechanism, the prices of which serve as one of the spot market indicators for domestic trucked LNG prices, which are not government-regulated and reflect spot demand.

PetroChina Natural Gas Sales Branch conducted an auction for pipeline gas to be supplied in the second half of November to LNG plants in western regions Nov. 14, with around 131.67 million cu m of gas being sold at Yuan 2.67-2.68/cu m, down Yuan 0.14-0.28/cu m from the previous batch of gas for H1 November delivery, according to market sources.

The company has conducted three auctions, selling a total 395.67 million cu m of November-delivered pipeline gas via the Chongqing exchange, with prices averaging Yuan 2.96/cu m, down 4.4% year on year, according to S&P Global Commodity Insights' calculation based on data from industrial sources.

"It's atypical that H2 November gas [prices] are cheaper than H1 November gas, as prices normally move up with lower temperatures," said an industrial source.

Industrial sources said the auction price for the H2 November gas translates to a cost of around Yuan 4,680-4,695/mt after processing into LNG, while trucked LNG in northwest regions was traded at around Yuan 4,391/mt Nov. 14, even lower than the processing cost, Chongqing exchange data showed.

Oversupply

Trade sources said ample supply, amid weak downstream demand, has led to a significant drop in trucked LNG prices over the past month.

Trucked LNG prices were around Yuan 4,300/mt in the Beijing-Tianjin-Hebei region Nov. 14, down Yuan 850/mt from Yuan 5,150/mt on Oct. 11, data from domestic gas distributor ENN Group showed.

"We faced significant pressure recently due to an influx of inventory that we needed to sell off quickly. Although the pressure has eased, we haven't seen a significant rise in downstream demand," said an LNG importer and city gas distributor in the Beijing-Tianjin-Hebei region.

Another trade source in east China echoed similar sentiment, saying they are preoccupied with selling off stocks. "Our inventories are almost full, and we have little space for incoming cargoes... Other players are facing similar issues."

"Over-purchasing in anticipation of extreme weather and lower prices has left them struggling to offload goods, forcing price reductions to create storage space," the east China-based trade source added.

Both sources said the warm weather diminishes the likelihood of buyers being incentivized by lower spot prices, as there is no pressing need for purchases.

Commodity Insights' previous report showed that many October-November arrivals were procured at prices of $12 plus/MMBtu, necessitating sales at around Yuan 5,200/mt to break even.

The National Development and Reform Commission earlier said China is well-prepared for the heating season, with sufficient natural gas supply, and domestic gas suppliers will ensure full gas storage before winter.

Weak demand

Nevertheless, downstream demand remains weak, leading to continued price declines, trade sources said.

Apart from mild weather, industrial demand is lackluster, and shrinking demand from the transportation and power generation sectors is believed to have also dampened total gas demand growth, according to sources.

Sales of LNG heavy-duty trucks in China dropped sharply by 76.1% year on year and 45.7% month on month in September, industrial data showed.

LNG fuel has lost some of its economic advantages compared with diesel, as the price of diesel dropped more significantly than that of LNG, discouraging demand from LNG trucks. China's recent economic stimulus package includes subsidies for diesel trucks but excludes LNG trucks, likely also contributing to the decline in LNG truck sales, industrial sources said.

Furthermore, with the peak summer power demand season concluded, gas demand for power generation is expected to decrease in October, further constraining overall natural gas consumption, sources added.