Asian Demand For LNG Remains Resilient

By Paul Homewood

 

 

Global gas demand has proved to be resilient this year, despite coronavirus. This is particularly so in Asia, where they have been taking advantage of low prices.

Timera report:

 

2020 is vying for the prize as the most turbulent year in the history of hydrocarbon markets.

Oil demand has plunged as Covid-19 spread globally.  Data is pointing to a more than 25% year-on-year decline in global oil demand in Apr-2020. Across the full 2020 year, demand could fall more than 10%, a huge hit compared with any historic precedents. The impact of Covid-19 on oil demand has been particularly acute because of the sudden stop in transport related demand, particularly in the aviation sector.

The virus impact on global gas demand is different in nature. Residential gas demand is quite resilient to economic shocks, compared to industrial demand which is closely linked to economic growth. Power sector gas demand depends on relative fuel pricing and the level of power demand (also linked to economic activity).

The IEA is forecasting a more than 5% decline in global gas demand across 2020, although this is guesswork at best given current economic uncertainty.  But would a decline in global gas demand pull down LNG demand by a similar proportion?

In today’s article we focus on the impact of Covid-19 on LNG demand.  Specifically we focus on Asian demand as the primary driver of the evolution of LNG market balance.  We look at 5 charts that illustrate the evolution of actual demand data so far in 2020.

These charts paint a very different picture to the oil market. They also hint at LNG demand being more resilient than global gas demand in the face of the current economic shock… at least so far.

Chart 1: Global LNG demand in a 5 year context

Source: LNG Unlimited, Timera Energy

Asia has been the main driver of growth in global LNG demand across the 2015-18 period. However Asian demand growth ground to a halt in 2019.  2019 was also the peak year of supply growth from the current wave of new LNG liquefaction projects.

By the end of 2019, the combination of large volumes of new supply and negligble demand growth, had already pushed the LNG market in a state of pronounced oversupply and declining prices. The 2020 demand impacts of Covid-19 need to be considered in this context.

Chart 2: Monthly Asian LNG demand growth (year on year)

Source: LNG Unlimited, Timera Energy

The black line shows the path of Asian LNG demand so far in 2020. Demand is actually running 4% above the first four months of 2019, despite the impact of Covid-19. On first observation this seems somewhat implausible.  But there are some important factors in play behind the headline numbers.

There is considerable LNG supply chain & contractual inflexibility within a 2-3 month horizon that means LNG cargo deliveries may be locked in, even against a backdrop of sharply falling gas demand.  As a result, large Asian buyers have been filling available storage capacity, as well as trying to divert deliveries where possible (e.g. PetroChina’s attempts to call force majeure on some LNG contract volumes).

So considerable uncertainty remains as to the path of Asian LNG demand across the remainder of 2020, but so far the data has been pretty resilient to the Covid-19 shock.

Chart 3: Has the China dip already happened?

Source: LNG Unlimited, Timera Energy

Chinese LNG demand is particularly important because China has (i) been the engine room of Asian LNG demand growth across the last 5 years and (ii) been impacted sooner and to a greater extent by Covid-19 than other Asian countries.

Chart 3 shows a Feb-2020 dip in demand coinciding with the peak shutdown period, followed by a recovery in volumes in Mar & Apr 2020. Across the first 4 months of 2020, Chinese LNG demand is similar to 2019, despite the impact of Covid-19.

Chinese buyers have also been in the market across the last 4 weeks purchasing spot cargoes. This points to price responsive demand given record low prices (JKM currently around 2.50 $/mmbtu).

Accurate data on Chinese gas demand and storage inventories is notoriously difficult to come by. But there is no doubt that behind these resilient LNG demand numbers, underlying Chinese gas demand has fallen and storage inventories are likely to be high. Gas demand growth is vulnerable to depressed economic activity in China’s manufactured goods export markets (dampening industrial sector gas demand).

The key uncertainty across the remainder of 2020 is how fast the Chinese economy bounces back to support incremental LNG demand growth.  There are three factors that may help here:

• China’s current easing of shutdown restrictions should drive at least a sharp temporary recovery in GDP across Q2-Q3 2020
• The competitive dynamics of imported gas have improved significantly given very low spot LNG prices (even if domestic gas prices in China do not yet fully reflect this)
• China has reportedly taken a more open stance on liberalising gas market access, which should support second tier players to take advantage of lower LNG spot prices.

Estimates for Chinese GDP growth in 2020 are currently around 2.0-3.5% (vs 6.1% in 2019). That suggests an annual decline in Chinese gas demand of at least 5%. But the impact on LNG demand may be significantly less than this given the mitigating factors above.

Full article here.

 

It is scandalous that the UK still continues to focus on expensive renewable energy, instead of taking advantage of the ultra low prices available for LNG, as they are doing in Asia.