Balanced Supply-Demand Keeps LNG Prices Stable This Winter
The completion of the China-Russia East Route pipeline marks a significant milestone in Sino-Russian energy cooperation. On November 18th, the National Pipeline Network Company of China announced that the pipeline project has reached the final stage of preparations before production begins. Just prior to this, at the end of September, the Russian gas company Gazprom had revealed plans to increase the gas supply through this pipeline to its maximum capacity in December, raising daily supply levels from approximately 8 million cubic meters to around 10 million cubic meters. This surge in capacity not only reflects the growing partnership between China and Russia but also hints at the transformative potential for energy supply in the region.
The introduction of the East Route pipeline is expected to ease the natural gas supply and demand gap domestically in China. Based on predictions from Longzhong Information, a major energy consulting firm, the supply-demand gap for natural gas is projected to turn positive in November, with a further increase to nearly 1.939 billion cubic meters in December. These forecasts indicate a shifted balance between supply and demand, suggesting a more relaxed overall market for natural gas as we move toward the end of the year.
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In the broader context of the winter season, the Liquefied Natural Gas (LNG) market currently exhibits a moderate trend. Its prices are predominantly supported by the demand from the automotive sector and the peaking gas segment. The automotive market, while stable in usage, has a limited capacity to absorb high prices. Analysis reveals that the monthly usage patterns for LNG in the automotive sector remain largely consistent, albeit marked with some uncertainties due to the ongoing economic climate. For instance, observed data indicates that when LNG prices surpass 5,000 Yuan per ton, the market’s ability to sustain such pricing diminishes rapidly, resulting in a significant drop in consumption. Thus, it could be inferred that the price tolerable threshold for the automotive sector hovers around this mark.
The interaction between city gas and the pricing of contracted gas also directly influences how urban gas companies procure LNG for peaking. Two potential scenarios unfold in this context. The first scenario occurs when city gas companies find their contracted gas insufficient. In such cases, they may resort to auctioning off additional resources. If the price of LNG remains below the external contract price, such economic considerations drive city gas companies to procure additional LNG. The comparative analysis of external gas prices across various regions, like the southwest and northern parts of China, alongside LNG delivery rates shows that for most of the year, LNG prices have been elevated until November, when the auction prices for external contracts began to climb, thereby revealing the economic viability of LNG.
The second scenario emerges when there’s a significant shortfall in contracted gas supplies coupled with an urgent need to maintain supply. Such a situation compels city gas companies to acquiesce to higher LNG purchasing prices. This scenario often surfaces from a severe underestimation of gas demand or the onset of extreme weather conditions, leading to sudden spikes in consumption.
Weather plays a crucial role in gas consumption patterns, with a marked drop in temperatures expected to escalate demand for LNG. Meteorological forecasts indicate that although this winter exhibits the La Niña phenomenon, which typically signals colder conditions, its relatively weak strength, combined with the effects of climate change, suggests that this year’s winter may not be as frigid as anticipated. Projections for December suggest moderate temperatures in Beijing, aligning closely with historical averages. However, as always in weather prediction, there exists a level of uncertainty that cannot entirely rule out the possibility of sudden, extreme weather events.
While production costs do influence LNG prices, the significance of this factor seems to diminish as market dynamics shift. The relationship between gas source costs and LNG prices remains strong during periods of balanced supply and demand; nevertheless, an ample supply of LNG has subtly weakened this correlation. High inventory levels and urgency in dispatch necessitate operational sacrifices, leading to situations where companies may experience losses, as seen with projected pre-sales prices reaching 3.14 to 3.37 Yuan per cubic meter. This disconnect hints at a broader dynamic in the market whereby an expansive supply has generated substantial flexibility despite high costs.
This winter, the overarching context for the development of the LNG market revolves around a far more relaxed natural gas supply scenario. Enhanced peak-shaving gas storage capabilities allow for a reduced pressure on the LNG market. When considering the exhibited demand behaviors from both the automotive and peaking gas markets, it can be anticipated that pricing during this heating season will remain relatively moderate. Nonetheless, localized shortages may periodically stem from insufficient resource distribution, especially as we transition into late December and early January. Price forecasts for December suggest a high range of about 4,700 to 4,900 Yuan per ton, with temporary spikes above 5,000 Yuan without sustained durations. This reflects a cautious yet optimistic outlook for natural gas consumers as the winter unfolds.