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Asian LNG Market In Winter Supply Tight Enough Next Year
Oct 19, 2017

Demand for liquefied natural gas (LNG) in Asian markets has risen before the peak demand in winter, with gains of nearly 40% in the past six weeks and possibly rising further.

The main driver of the current price increase is stronger than expected Chinese demand. China is increasing the use of LNG in the winter instead of coal-fired heating.

The Chinese government is investing heavily in building natural gas infrastructure, turning about 400 million homes from coal into natural gas. Consultant Wood Mackenzie estimates that China's natural gas demand could rise to 10 billion cubic meters this winter.

According to China Customs data, from January to August this year, China's LNG imports increased by 44.3% to 22.1 million tons. China is still the world's third largest importer of LNG, behind Japan and South Korea. However, China's imports grew the fastest, the greatest potential for growth.

Spot LNG prices have responded to China's demand growth, as of September 29, when the week rose to $ 8,830 per million British thermal units, compared with the August 25 hit the recent low of $ 6.05 rose 39%.

In contrast, LNG spot prices soared to 86% in September last year.

Historical conditions show that this year before the winter prices are still further upside, but LNG may eventually become a victim of their own success.

For China, the expansion of natural gas networks may require additional funding for natural gas subsidies.

Although the price of LNG is much lower than the spot peak per million British thermal units $ 20.50 level, but still much higher than the coal price.

If LNG costs continue to rise, it will lead to China's slowdown in the deployment of natural gas infrastructure.

It may be simpler to cut production by large industrial enterprises in the winter months, which is faster and cheaper than turning to natural gas.

Although the Asian spot LNG prices are mostly due to demand-driven, but the supply side is also worth a look.

Although the United States is not the main seller of the Asian market, but in recent weeks its exports due to sweeping across the Gulf of Mexico hurricane "Harvey" and be affected, that the only one operation of the United States LNG export terminal.

According to Thomson Reuters supply chain and merchandise forecasts for vessel tracking and port data, US August LNG exports were 920,000 tonnes, the lowest since March. The data show that during the period from August 24 to September 8, the United States did not leave the cargo, but in September cargo shipments remained at 1.12 million tons, the second highest so far this year.

The loss of small cargo in the United States may be part of the reason for tight supply, but it is worth noting that exports of US LNG will increase over the next few months as the second export terminal begins to produce.

Three LNG export plants in the United States are scheduled to begin operations by the end of 2018, and most of their production takes into account Asian buyers.

In Australia, Chevron's annual production of 8.9 million tons of Wheatstone project has also entered the commissioning phase. Shell's 3.6 million tonnes of Prelude Floating LNG facilities and Nippon International Petroleum Development's 8,000-million-tonne annual Ichthys project are scheduled for next year.

This means that although LNG may appear to be in some tight supply in the coming winter, it may be adequately supplied in 2018.

If China can reproduce this year's LNG import growth rate in 2018, it will help to eliminate any excess supply. However, if spot LNG prices continue to rise, China may limit the purchase of LNG and rely on existing long-term contracts.