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A Limited Risk Play In A Shaken Market

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China’s CNOOC Spends Big In Panic Hoard of LNG

LNG

Chinese state-owned company CNOOC, the country’s largest importer of liquefied natural gas (LNG), has leased two tankers to store emergency LNG supplies offshore, spending US$10 million on the plan, as China’s massive coal-to-gas switch leads to an unprecedented soaring gas demand and concerns of fuel shortages this winter.

“It’s like buying insurance to cover winter demand spikes,” a trading source with knowledge of CNOOC’s tanker lease deal told Reuters.

Last year, CNOOC hired one tanker to hoard LNG supply, the source said, but noted that this year it is the first time that two tankers have been hired.   

“CNOOC arranged [to lease the two tankers] months ago anticipating the shortage will be severe this year,” the source told Reuters.

The lease of an LNG tanker is very expensive, as is keeping the gas cooled, so the cost of holding such tanker is much higher than keeping crude oil in storage.

While one could make the business case for storing LNG for later sale in case of a market contango, when prompt prices are lower than future prices, the current Asian spot LNG curve is in the opposite state of contango—backwardation—with LNG for January delivery nearing almost $10 per million British thermal units (mmBtu), while April delivery prices are at just over $7 per mmBtu.

The expensive leases of the LNG tankers and the uneconomic stashing of the fuel is proof of the unusual moves that China’s biggest LNG importer has made to cover winter shortages, according to Reuters.

Related: Don’t Expect Aggressive U.S. Shale Drilling

Earlier this week, China’s state planning commission ordered eight Chinese regions to “regulate” surging gas prices amid winter heating demand and the switch to gas from coal. Last week, Asia’s LNG spot prices jumped to the highest since January 2015 due to the Chinese demand and strong oil prices. 

China’s imports of LNG between January and October this year soared by 47 percent compared to the same period last year, according to Platts. 

Even with surging LNG imports, Chinese regions in the north have been experiencing gas supply shortages in recent weeks, due to China ramping up efforts to move from coal to gas, and to a cold spell in the country.

By Tsvetana Paraskova for Oilprice.com

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