SINGAPORE – China’s switch from coal to gas is a “heavily overlooked factor” in record-high natural gas prices, according to the political risk adviser Eurasia Group.
Henning Gloystein, director of energy, climate and resources for Eurasia, said that millions of households in China are estimated to have switched from coal to natural gas to heat their homes in 2020.
Most of these transitions took place in the last quarter of the year, just before winter came, he told CNBC’s Squawk Box Asia on Monday.
Natural gas prices in Asia fell to a record low in the second quarter of last year as the coronavirus crisis spread. However, since July they have increased by more than 1,000%.
According to S&P Global Platts, the Japan-Korea marker (JKM) reference price for liquefied natural gas hit a record high of $ 32.49 MMBtu in February last week.
Much of the price hike is due to the extremely cold weather in North Asia, which resulted in an increase in the demand for natural gas for heating.
But Gloystein said the new demand from China likely pushed prices to record highs as well.
“We think this is a big overlooked factor,” he said. “Sure, it was cold in the northern hemisphere and there were even some outages, but what happened in China last year is – there are estimates that more than 10 million households have switched from coal to natural gas.” “
The cargo ship Cygnus Passage from Russia with liquefied natural gas (LNG) will dock in Tianjin, China on January 7, 2021 at an LNG terminal operated by the China Petrochemical Corporation (Sinopec Group).
VCG | Visual China Group | Getty Images
According to some estimates, this is equivalent to switching all Australian households to a different fuel in a year, according to Gloystein.
“Then it got really cold and suddenly they had to meet all this new demand,” said Gloystein.
Utilities and energy companies don’t have enough storage to prepare for such a sharp surge in demand, he said. As a result, demand exceeded supply and brought prices to record highs.
According to Gloystein, companies typically build storage in the summer and use it in the winter to replenish as needed. This time around, however, China suddenly had to buy more gas for new customers at “literally any price and nobody in the market was prepared for it”.
Prices may have peaked
Still, prices are unlikely to stay high for long.
“We heard individual loads actually sold in the high 30s, I heard one at $ 39 [per million British thermal units]”Gloystein said. This level appears to be the” high mark “for prices and the high point, he said.
The price jump was “pretty extreme,” but won’t last long as the cold season ends and demand for heating will fall, he said.
“At some point it will of course get a little warmer,” he said. “February and March prices will likely go down because … winter is sure to end.”
“This is probably the high point of the peak,” he said.