October 18, 2022 [Reuters] – China’s inadvertent support for global liquefied natural gas (LNG) markets is likely drawing to a close, as the world’s second-biggest buyer of the fuel cuts back on re-selling unneeded cargoes.
Europe has been the major beneficiary of China cutting its LNG imports in 2022, as the gas-starved continent has been able to buy both spot cargoes that China didn’t take, as well as some contracted cargoes that China re-sold.
China has asked state-owned LNG importers to stop reselling cargoes to buyers in Europe and Asia in order to ensure sufficient domestic supplies for the upcoming winter demand peak, Bloomberg News reported on Monday.
Such a move will likely see China’s LNG imports rise in coming months, but they are still likely to be below the levels that prevailed last winter.
This is because while China will now take contracted volumes, it’s still likely that it will stay out of the spot market, given prices are high and inventories are adequate.
This means that the LNG market will tighten slightly, but there is still likely to be sufficient cargoes available to meet demand in Europe and in Asia.
China overtook Japan to become the world’s top LNG importer in 2021, but is likely to lose the crown this year as it shunned the super-chilled fuel amid a surge in spot prices in the wake of Russia’s Feb. 24 invasion of Ukraine.
China’s imports in the first eight months of the year were 40.64 million tonnes, down 28.1% from the same period in 2021, according to customs data.
Arrivals in September are likely to have picked up, with commodity consultants Kpler estimating imports of 4.96 million tonnes, up from August’s official number of 4.72 million.
October imports are also likely to see an increase, with Kpler estimating arrivals of 5.78 million tonnes.
However, even if the October volumes are as high as Kpler forecasts, they would still fall short of the 6.05 million tonnes from October last year.
China has in past years increased LNG imports over the winter period by bidding for spot cargoes, with Kpler reporting imports of 7.01 million tonnes in November last year, 8.21 million in December and 7.18 million in January.
China operates a fixed wholesale price for natural gas, with a cap of around $20 per million British thermal units (mmBtu).
Even though spot LNG prices in Asia have been dropping in recent weeks, they are still more than 50% above that level, meaning importing spot cargoes means heavy losses.
The weekly spot price for LNG in north Asia fell to $32.50 per mmBtu in the seven days to Oct. 14, down from $34 the prior week and some 52% below the record $72.50 hit in the week to Aug. 26.
The spot price in Asia is also currently below the benchmark Dutch natural gas price , which ended at 130 euros ($127.92) per megawatt hour on Monday, which is equivalent to around $37.48 per mmBtu.
This means there is still a price incentive for spot LNG cargoes to head from Asia to Europe, although Europe currently has sufficient winter gas inventories and the region’s ports are battling to offload all the LNG vessels that are arriving.
More than 35 LNG vessels are waiting to offload cargoes at European ports, which shows the pressure on the continent’s re-gasification capacity.
For the early part of the upcoming winter, it may be the case that Europe doesn’t buy heavily in the spot LNG market, meaning more cargoes will be available in Asia.
Japan and South Korea, Asia’s third-biggest LNG importer, may also not be too active in the spot market, with inventories in both countries at relatively high levels. read more
There are several factors that could still spur a surge in demand for spot LNG, such as a colder-than-expected Northern Hemisphere winter or further curtailment of Russian pipeline supplies to Europe.
But for now, the situation in major LNG importers looks comfortable from an inventory and demand perspective.
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