Commodities
Global gas market outlook – lurking danger: China could turn the gas market upside down
The global gas market outlook is bleak. The temporary decline in demand for LNG in China hides a great danger for the global gas market.
The main surprise of the current situation on the global gas market is the strange behavior of Beijing. While everyone is scrambling around looking for liquefied natural gas (LNG) carriers, there is a strange calm in the Middle Kingdom, which was the world’s main LNG importer last year. The “Chinese anomaly,” however, has a simple explanation.
Global gas market overview – the actions of Chinese traders
Gas market analysts cannot give any precise forecasts. Chinese traders have decided to take a risk and not buy LNG at astronomically high prices. They expect Beijing to continue its zero-tolerance policy towards Covid-19, which significantly restrains the growth of fuel and energy demand in the country. Naturally, traders don’t want to buy LNG at very high prices in advance, which Chinese refineries don’t really need right now.
“This means,” Bloomberg quotes Toby Copson of Trident LNG as explaining, “that China’s (gas) supply is fine and that they have enough pipeline gas and their own coal, at least for now.
In the first six months of 2022, China’s LNG imports were down by about 20%. This is certain to cause China to lose its status as the planet’s top LNG importer this year.
Of course, Chinese traders are taking a big risk by not buying LNG now. If temperatures drop sharply in the fall or winter, or if the Chinese economy returns to its normal growth rate when the pandemic is over and restrictions are relaxed, they will be in a tight spot. In that case, they will have to return to the market urgently, with all the consequences that entails. The main thing for the market and its participants is that the return of Chinese buyers will further exacerbate the LNG shortage and increase LNG prices.
You don’t have to look far for examples. In January 2021, abnormally cold temperatures prevailed over much of China. Chinese traders then rushed to the spot market to buy LNG, causing the price to skyrocket.
The current sluggishness of Chinese traders on the gas spot market gives buyers from other Asian and European countries the opportunity to fill their storage tanks with gas. It has gotten to the point where Chinese companies are now reselling surplus LNG to Europeans.
The Chinese government will of course try to avoid buying LNG at the current very high prices. First, Chinese miners have been ordered from above to sharply increase coal production. In the first half of the year, it passed the 2.2 billion ton mark, according to China’s National Energy Administration, an 11% increase over the first six months of 2021.
Second, Beijing is increasing imports of cheap pipeline gas, mostly from Russia, and increasing production of its own “blue fuel.
China’s energy demand has now declined, mainly due to the coronavirus pandemic, which has not let the Middle Kingdom out of its clinging embrace this year. Lockdowns, which are causing huge damage to the economy, nearly caused a downturn in the Chinese economy in the second quarter.
How long will the “Chinese anomaly” last?
Against the backdrop of what is happening, analyzing and predicting global gas market growth is difficult. No one is willing to predict how long the “Chinese anomaly” will last. President Xi Jinping has repeatedly stated Beijing’s commitment to zero tolerance for coronavirus. This means that lockdowns and restrictions will not go away. The latest major city to begin imposing restrictions this week is Shenzhen, the largest economic center in the south of the country, dubbed China’s Silicon Valley.
Despite the ongoing fight against the pandemic, China’s economy showed clear signs of recovery in July. Goldman Sachs analysts predict a surge in business activity in China in the coming months, which will undoubtedly be felt by the entire planet and, above all, by gas markets.
The return of Chinese gas importers to the spot market means a sharp increase in competition between Asian buyers for LNG carriers and Europeans. Europe will have to further reduce gas consumption to be better prepared for the coming winter and pump as much gas as possible into underground storage facilities.
The cost of May futures on Brent crude oil fell to $72.74 per barrel, losing 0.31%, according to data from the ICE exchange. Brent was trading at about $70 a barrel at its low for the day. That’s a record low for at least 15 months, that is, since December 2021.
WTI prices are also falling, with futures prices down to $66.43 a barrel (-0.46% from last week’s close), according to the exchange. WTI was trading at $64.12 a barrel at its low for the day. This is also the lowest value since at least December 2021.
The market is thus responding to the banking crisis: since the beginning of March, three banks (Silvergate Bank, Silicon Valley Bank, Signature Bank) have closed their doors in the US, and the day before, on March 19, Swiss UBS took over its rival, Credit Suisse, buying the bank for $3.2bn amid fears of its collapse. Investors fear a recession, which may cause a crisis in the banking sector, as a recession, in turn, would lead to lower demand for fuel, the agency said.
“Oil prices are moving mainly because of fears [of further oil price dynamics]. Supply and demand fundamentals are almost unchanged, only the banking problems have an impact,” said Price Futures Group analyst Phil Flynn.
Oil prices lifted from daily lows helped the S&P 500 and Dow Jones indices, which rose Monday, writes Reuters. Traders raised their expectations that the U.S. Federal Reserve would refuse to raise rates this Wednesday to protect financial stability amid banking problems, the agency noted.
“Volatility is likely to persist this week, with broader financial market concerns likely to remain at the forefront,” ING Bank analysts said in a note. They add that the impending Fed decision adds to uncertainty in markets.
Earlier we reported that the price of Brent dropped below $75 per barrel for the first time in more than a year.
Gold prices may continue to rise, analysts polled by the CNBC TV channel said. In their opinion, the difficulties of banks and a possible turning point in the policy of the Federal Reserve indicate the possibility of a new rise in gold prices.
“I think it’s likely that we’ll see a strong move in gold in the coming months. The stars seem to be aligned for gold, and it could soon break new highs,” said Craig Erlam, senior market analyst at brokerage Oanda.
The expert explained that interest rates are now at or close to their peak, and the market, amid recent developments in the banking sector, is laying on an earlier than previously expected start of rate cuts. They also added that this situation would boost demand for gold even if the U.S. dollar weakens.
This month, Fitch Solutions rating agency predicted that gold prices would reach $2,075 an ounce “in the coming weeks” amid global financial instability, writes RBC. The company also added that gold prices will remain at a higher than pre-pandemic levels in the coming years. Craig Erlam confirmed this forecast.
Other Wall Street experts are also predicting a long-term rise in gold prices. For instance, Tina Teng, analyst for British financial company CMC Markets, thinks that the U.S. Federal Reserve’s sooner departure from its policy of raising interest rates might provoke another rally in gold prices due to the weakening U.S. dollar and falling bond yields.
Earlier we reported that oil prices accelerated their decline, continuing a trend from the beginning of the week.
Analysts at U.S. bank Goldman Sachs, one of the most optimistic forecasts about the cost of oil, changed its earlier forecast about the growth of oil prices to $100 in the next 12 months, Bloomberg said.
Now analysts predict that Brent crude oil will reach $94 per barrel in the next 12 months and $97 per barrel in the second half of 2024, the publication said.
The bank said oil prices have fallen despite rising demand in China, given pressure on the banking sector, recession fears and investor withdrawal.
“Historically, after such traumatic events, price adjustments and recoveries are only gradual,” the bank notes.
This week, the situation surrounding Swiss bank Credit Suisse triggered panic in the markets as oil plummeted to a 15-month low and Brent crude fell 12% to below $73 a barrel.
After the price decline, the bank expects OPEC producers to increase production only in the third quarter of 2024, contrary to Goldman’s forecast that it will happen in the second half of 2023. Analysts at the bank believe a barrel of Brent blend will reach $94 in the next 12 months and trade at $97 in the second half of 2024.
Bloomberg reported that the largest oil exporter, Saudi Arabia, announced higher April oil prices for markets in Asia and Europe.
Earlier, we reported that Iraq and OPEC advocated for guarantees of no fluctuations in oil prices.
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