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"How China Could Send LNG Prices Into The Stratosphere" by Irina Slav

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How China Could Send LNG Prices Into The Stratosphere

By Irina Slav - Aug 01, 2022, 5:00 PM CDT

  • Six years ago, China suffered a severe natural gas shortage and has since been very careful to ensure it has as much gas as it needs before winter.
  • One of the few things keeping a lid on natural gas prices this year has been a significant reduction in Chinese LNG imports.
  • If China has a colder than expected winter or if there is a change in its Covid strategy, then global LNG markets are sure to get even tighter.

China, which last year became the world’s top importer of liquefied natural gas, has been importing a lot less of it this year. Imports were down by as much as 20 percent amid skyrocketing prices in the first half of the year and buyers are still holding back on more shipments. But this could change on a dime.

Six years ago, China was hit by a severe natural gas shortage in the north, leading to blackouts and heating outages for millions of people. This was the result of a rushed shift from coal to gas, with gas transportation infrastructure and imports falling short of demand in peak season.

Since then, China has been very careful to have all the gas it needs ahead of winter to avoid a repeat of the 2017 crunch. This is how it became the world’s biggest importer of liquefied gas last year, and this is why now its lukewarm appetite for that same liquefied gas is causing concern among traders.

According to a recent Bloomberg report that cited gas trade industry insiders, China’s behavior is out of the ordinary. This in itself is not necessarily bad. If China is buying less LNG, there will be more for Europe, which has been doing everything it can to fill as much of its gas storage as it can before the heating season starts.

Yet, according to the traders Bloomberg talked to, if a cold spell suddenly boosts demand in the winter proper, China will immediately start snapping LNG cargos, potentially worsening an already tight supply situation.

Cold spells are not unusual during the winter but there is also another risky aspect to the current behavior of Chinese LNG buyers. In many ways, it is even riskier than counting on a mild winter: they seem to be counting on more restrictions due to Covid in the coming months, which would keep the demand for energy in check.

China has a zero-Covid policy that has led to several strict lockdowns, including this year, which affected the rate at which its economy expanded and, naturally, led to lower energy demand. Recently, the Chinese Politburo defended that policy, saying it would aim to strike a balance between zero-Covid and economic growth. Future flare-ups of infections, however, are not a certainty for the winter, unlike low temperatures.

Related: Saudi Arabia’s Real Production Capacity: Is 15 Million Bpd Possible?

“Right now, the lockdowns have impacted industry, and China is working through the backlog of industrial activity and demand,” Toby Copson, global head of trading and advisory at Trident LNG told Bloomberg. “If one of the biggest buyers in Asia comes back for volume when the rest of North Asia is competing with Europe - that’s a massive liquidity grab.”

Earlier this month, the International Energy Agency forecast that natural gas demand will actually contract this year and grow more slowly than previously expected because of excessive prices. It was an odd forecast amid Europe’s rush for gas, regardless of the price, which led to many cargos being diverted or resold by Asian buyers, including ones from China. It starts sounding even odder when one factors in the reversal from gas to coal to continue generating electricity in many countries, notably Germany but also China.

Coal, in fact, is one of the ways China is seeking to insulate itself from another gas shortage crisis. The authorities have ordered the industry to produce as much coal as it can, and it has ordered the same for the gas industry as well. Meanwhile, it is increasing pipeline gas imports, including from Russia, with which Beijing is currently discussing an expansion of the Power of Siberia pipeline.

The country has increased gas purchases from Russia this year, tripling the gas orders via the Power of Siberia over the first half from a year ago and significantly boosting imports from Turkmenistan, too, by more than 50 percent.

In the wake of the 2017 gas crunch, China vowed it would never again find itself in such a situation. One of the world’s top energy consumers has stayed true to its promise and has prepared for winter every year by boosting gas imports ahead of peak season.

The fact that now Chinese buyers seem to be disinterested in stocking up on LNG ahead of that season suggests that, more than anything else, China either has the gas it would reasonably need during the winter, or it can get it via pipeline from other sources at lower prices, too, as pipeline gas is normally cheaper than LNG.

Again, this is good news for Europe as that would leave more gas for its storage facilities that are filling up but haven’t filled up yet. The not-so-good news is that even though China may be set for winter in gas terms, there might still be insufficient LNG supplies to go around should the winter prove more severe than usual for any part of the northern hemisphere that relies on LNG to keep the lights and the heating on.

By Irina Slav for

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August 2nd Tuesday morning - US MARKET

Natural Gas Price Fundamental Daily Forecast – Shorts in Control Despite Hotter Forecasts

Last week, gas speculators boosted their net short positions to the most since March 2020, according to the U.S. CFTC’s Commitments of Traders.

Natural gas futures are trading lower on Tuesday, just slightly above a two-week low reached the previous session. Prices are being dragged lower by weakness in the crude oil market and an increase in gas output to record levels.

The price action continues to confound bullish traders who are betting hotter weather over the next two weeks than previous expected will final drive the market through the elusive $10 level over the near-term.

At 12:45 GMT, September natural gas futures are trading $7.960, down $0.323 or -3.90%. On Monday, the United States Natural Gas Fund ETF (UNG) settled at $28.50, down $0.12 or -0.42%.

Shorts Controlling the Trade

One reason why natural gas is struggling is that buyers are being met with strong opposition from short-sellers, most likely hedgers trying to lock in a profitable price. Last week, gas speculators boosted their net short futures and option positions on the NYMEX and Intercontinental Exchanges to the most since March 2020, according to the U.S. Commodity Futures Trading Commission’s Commitments of Traders.

If these short-sellers decide to dig in, the market is going to have a hard time rallying through the recent highs at $9.419 and $9.598. Not only will the shorts have to be taken out, but enough new buyers are going to have to come in to drive prices higher.

One thing about having a massive amount of shorts in the market, it could become oversold fairly quickly.

Refinitiv Reports Big Rise in Output

Data provider Refinitiv said average gas output in the U.S. Lower 48 States jumped to a record 96.7 bcfd in July from 95.7 bcfd in June. That compares with the prior all-time high of 96.1 bcfd in December 2021.

With hotter weather expected, Refinitiv projected average U.S. gas demand including exports would rise from 99.7 bcfd this week to 100.7 bcfd next week.



Daily Forecast

The early price action on Tuesday suggests traders are looking for value and that the short-sellers are in control. This could lead to a test of the short-term support zone at $7.372 to $6.888. Since the main trend is up, buyers could come in on a test of this area.

If they pass on the first support then look for the market to continue to slide into the longer-term support zone at $6.557 to $5.839.

For a look at all of today’s economic events, check out our economic calendar.

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Wed August 3rd - US

Natural Gas Price Fundamental Daily Forecast – May Have to Test $7.372 – $6.888 to Attract New Buyers

Something has to happen to chase the shorts out of the market or prices are going to continue to fall while traders seek value zone support.

Natural gas futures are inching higher on Wednesday, slightly above a short-term support area. The price action has been disappointing since July 26 when the market seemed poised to breakout to the upside and challenge the elusive $10.00 level.

Instead, it ran into a wall of short-sellers who are now controlling the price action. Buyers in the meantime are scarce as output rises and uncertainty grows over the intensity of the expected mid-month heat.

At 12:32 GMT, September natural gas futures are trading $7.777, up $0.071 or +0.92%. On Tuesday, the United States Natural Gas Fund ETF (UNG) settled at $26.41, down $2.09 or -7.33%.

Despite the forecasts calling for heat and worries about an undersupplied winter heating season, gas speculators boosted their net short futures and option positions on the NYMEX and Intercontinental Exchanges to the most since March 2020, according to the U.S. Commodity Futures Trading Commission’s Commitments of Traders.

That’s what may be holding back the market. Something has to happen to chase the shorts out of the market or prices are going to continue to fall while traders seek value zone support.

The nearest target is the short-term retracement zone at $7.372 to $6.888. The intermediate support is $6.557 to $5.839.

US Energy Information Administration Weekly Storage Report

Thursday’s EIA weekly storage report is expected to show a build of 25 Bcf for the week-ending July 29.

The U.S. Energy Information Administration reported last Thursday that domestic natural-gas supplies rose by 15 billion cubic feet for the week ended July 22. That compared to an average forecast for an increase of 25 billion cubic feet from analysts polled by S&P Global Community Insights.

Total working gas stocks in storage stand at 2.416 trillion cubic feet, down 293 billion cubic feet from a year ago and 345 billion cubic feet below the five-year average, the government said.

Short-Term Weather Outlook

According to NatGasWeather for August 3-9, “A weather system with showers will track across the Upper Midwest today with highs of 70s and 80s. The rest of the U.S. will be under strong upper high pressure with highs of 90s-100s, hottest California to Texas.

Hot high pressure will continue to rule nearly the entire U.S. through mid-next week with highs of 90s and 100s besides 80s near the Canadian border.

Overall, strong to very strong national demand.

Short-Term Outlook

When prices started to retreat after hitting $9.419, the question was raised, “Buy strength” or “Play for a Pullback?”

The price action suggests traders don’t believe in this market enough to chase it higher so we’re going to be looking for signs of buying on a test of $7.372 to $6.888 or $6.557 to $5.839.

For a look at all of today’s economic events, check out our economic calendar.

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United States - Bloomberg - Wed Aug 3rd

Natural Gas Surges With US LNG Export Terminal Set for Fast Restart


(Bloomberg) -- US natural gas prices surged after a key export terminal in Texas reached an agreement with regulators to restart as soon as October after an explosion.

Freeport LNG, which was shut down in June after a blast, has entered into an agreement with the Pipeline and Hazardous Materials Safety Administration to resume operations in early October at almost full capacity, the operator said in a emailed statement Wednesday. That would boost demand for natural gas by nearly 2 billion cubic feet a day, equivalent to roughly 2% of domestic output.

While Freeport had already indicated that it planned to resume operations in October, the news surprised traders who expected a more gradual restart after PHMSA, as the regulator is known, demanded a series of corrective actions from Freeport. The Texas plant must provide weekly updates to the agency and file a root cause analysis report within 90 days, according to order.

“The partial restart is bigger than previously expected,” said Brayton Tom, a senior risk manager for energy at StoneX Group Inc.

The restart of Freeport LNG is poised to increase the strain on US inventories of the heating and power-generation fuel ahead of winter. Concern about tightly supply has triggered stomach-churning volatility and led prices to more than double this year. Gas held in salt caverns and depleted aquifers is about 12% below levels typically seen for this time of the year, and booming domestic demand this summer has limited suppliers’ ability to add gas to storage.

“We previously had Freeport only returning to partial service in November, and the extra feedgas demand that is likely puts longer odds on the bearish side of the market,” said David Seduski, an analyst at Energy Aspects Ltd.

The restart of Freeport LNG should come as a relief for Europe, which desperately needs extra US gas. Reduced imports from Russia amid the war in Ukraine have sparked fears of a supply crunch this winter, sending prices in the region skyrocketing.

Gas for August delivery on the New York Mercantile Exchange settled up 7.3% at $8.266 per million British thermal units after earlier rising as much as 10%.

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US - Thursday August 4

Natural Gas Price Fundamental Daily Forecast – EIA Injection Over 40 Bearish, Under 30 Bullish

Weather-adjust power burns were looser last week compared with the current week. Based on this assessment, look a storage injection of 35 Bcf.

Natural gas futures are edging higher on Thursday, putting the market in a position to breakout to the upside following a dramatic technical reversal bottom the previous session. Underpinning prices is the news that the Freeport LNG plant remains on track to return to service in early October. The catalyst for a possible surge in prices, however, could be today’s weekly government storage report or a bullish midday weather forecast.

At 11:28 GMT, September natural gas futures are trading $8.335, up $0.069 or +0.83%. On Wednesday, the United States Natural Gas Fund ETF (UNG) settled at $28.53, up $2.12 or +8.03%.

LNG Regulator to Allow Freeport to Resume Partial Operations in October

After trading under pressure most of the session on Wednesday, September natural gas futures mounted a strong recovery into the close after the second-largest U.S. liquefied natural gas (LNG) exporter on Wednesday said it reached an agreement with a federal regulator that will allow it to resume some operations at its Quintana, Texas, plant in October, according to Reuters.

Freeport LNG shut the plant, which supplies about 20% of the U.S. LNG exports, following an explosion and fire on June 8. Its closure helped to push up LNG prices in Europe and Asia, and dampening U.S. natural gas prices.

This is potentially bullish news because it means more gas will be used for LNG protection with less going into storage. The United States became the world’s top LNG exporter during the first half of 2022. But not matter how high global gas prices rise, the United States cannot export any more LNG because its plants were already operating at full capacity.

Energy Information Administration Weekly Storage Report

Freeport is just part of the news today. Another part is the weekly government storage report. This report from the EIA, due to be released at 14:30 GMT, could offer some insight that launches the next spike to the upside, or plunge into a value zone.

According to Bespoke Weather Services, weather-adjust power burns were looser last week compared with the current week. Based on this assessment, they are calling for a storage injection of 35 Bcf.

That would compare with a 16 BCF injection into inventories for the comparable week last year, according to EIA. The five-year average build is 33 Bcf.

Natural Gas Intelligence (NGI) wrote, “A Bloomberg survey of eight analysts produced a range of injection estimates from 19 Bcf to 35 Bcf, with a median of 26 Bcf. A Wall Street Journal poll of 12 analysts had a tighter range of projections that averaged a 29 Bcf increase in storage. Reuters polled 15 analysts, whose estimates were as high as 37 Bcf, with a median forecast of 29 Bcf.”



Daily Forecast

An injection over 40 Bcf will likely be bearish for prices. This could drive the market into the first support zone at $7.372 to $6.888, followed by the long-term support zone at $6.557 to $5.839.

An injection under 30 will likely trigger a spike through minor resistance at $8.705. If this creates enough upside momentum then look for a possible surge into $9.419 to $9.598 over the short-run.

If the report fails to move the needle then traders will shift their focus on the weather reports that are coming in a little cooler for mid-month than previously expected. This is a potentially bearish development.

For a look at all of today’s economic events, check out our economic calendar.

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