Can China’s Growing Demand for Gas Balance the Market?

China’s growing demand for liquefied natural gas could help balance an oversupplied market challenged by new production coming from US and Australia.  
On Thursday, the director of the International Energy Agency Faith Birol said that Chinese gas demand will grow significantly and may help to speed up the end of the current global LNG glut.
In the first nine months of 2016, China’s imports increased 26.5 percent compared to the same period in 2015, customs data showed.
“If we see a major increase of gas in China, this will definitely be impacting the Asian and global gas markets given the sheer size of China,” Birol told Reuters.

Asia is the world’s biggest consumer of LNG. However, imports during the first nine months of the year from Japan, the world’s biggest buyer, have dropped 3.5 percent from year-ago levels.
South Korea, the world’s second-biggest LNG importer, has also seen a decline in imports by 5.8 percent.
With that being said, China’s growing demand of LNG, used extensively to transport natural gas, could impact and balance the Asian and global gas markets faster than estimated.
“When you look at the global energy mix today, the share of gas is about 25 percent. And in China, it is about 5 percent. There is a big difference there, and what we expect is the Chinese gas market will grow significantly,” Birol said.

Balancing the gas market

Winter weather is the most common driver for demand and prices. This week, a cold snap in northeast Asia and the first snow fall in Tokyo in 54 years have boosted prices for thermal coal and LNG.
In addition, China’s aim to shut almost half a million small-scale coal boilers in its industrial sector by 2018 could mean a positive move for the LNG market.
However, oversupply, deepened by new US and Australia production, can bring a challenge, as buyers push to change existing contract terms that include destination restrictions and longer-term pricing.
A recent report by IEA shows that contract structures are becoming less rigid, which is helping to increase market liquidity.

Speaking at the LNG Producer-Consumer Conference in Tokyo last week, Woodside CEO Peter Coleman said: “The era of 20-year contracts is not over, because the old truths are still just that —suppliers cannot fund the massive investment required to build new LNG projects without long-term offtakers to provide the rates of return that our bankers and shareholders demand.”

LNG prices decline

Prices for LNG in Asia have fallen by about 65 percent since their peak in early 2014 to current levels of about $7.30 per million British thermal units (mmBtu).
Qatar, currently the world’s largest exporter of LNG, is expected to lose its top position to Australia next year when new production from the latter comes on line.
Qatari energy minister Mohammed Saleh Abdulla Al Sada said: “While the low price and oversupplied market environment will benefit consumers in the short term, it is also likely to lead to a new period of market tightness and price spikes at some point in the future,
“The combined effect of the slow global economy and rising LNG supplies will lead to an oversupplied LNG market which will take some time to rebalance,”Al Sada said.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.