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China’s shift from coal to gas is a “serious underestimated factor” in record high natural gas prices, according to political risk consultancy Eurasia Group..
Henning gloystein, Director of Energy, Climate and Resources, Eurasia Group, pointed out that millions of households in China, he estimates, have switched from coal to natural gas to heat their homes in 2020.
Most of these transitions occurred in the last quarter of the year, shortly before the onset of winter, he told CNBC on Monday..
Natural gas prices in Asia fell to a record low in the second quarter of last year due to the coronavirus crisis, but they are up more than 1000% since July.
According to S&P Global Platts, liquefied natural gas (JKM) spot price benchmark hit a record $ 32.49 MMBtu in February last week.
The rise in prices is largely attributable to extremely cold weather in North Asia, which has led to a sharp increase in demand for natural gas for heating.
Gloystein believes renewed demand from China is also likely to lead to record high prices..
«We think this is very often overlooked, ”he said. – Of course, it was cold in the northern hemisphere, and there were even some supply disruptions, but what happened in China last year is this: it is estimated that more than 10 million households were transferred from coal heating… for natural gas».
By some estimates, this is the equivalent of switching all Australian households to alternative fuels in one year, according to Gloystein..
«Then it got really cold, and suddenly they had to satisfy all this new demand», – said Gloystein.
Utilities and energy companies did not have enough storage facilities to prepare for such an increase in demand, he said. As a result, demand exceeded supply and raised prices to a record high.
Gloystein said companies typically build up warehouse space in the summer and use it in the winter, replenishing it as needed. However, this time, China suddenly had to buy more gas for new consumers. «literally at any price, and no one on the market was ready for this».
But prices are unlikely to stay high for long.
«We have heard that individual lots do sell for $ 30, and I once heard of a $ 39 deal [per million Btu]», – said Gloystein. According to him, this level seems «the highest mark» for prices and their peak.
Representative Eurasia Group admits that although the price jump was «pretty sharp», it will not last long, as the cold season ends and the demand for gas for heating will fall.
«At some point, of course, it will get a little warmer, ”he said. – Prices for February and March will probably go down because … winter will definitely end».
«This is probably the peak of the burst», – summed up the expert.