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Coronavirus adds to LNG market woes
The coronavirus outbreak in China is hitting the country’s energy demand hard, with CNOOC declaring force majeure on some LNG deliveries
COMMENTARY
WHAT:
CNOOC’s force major declaration is the latest blow for the LNG market.
WHY:
LNG spot prices were already at record lows before Chinese demand started falling.
WHAT NEXT:
US LNG exporters could be facing cancelled cargoes, forcing them to cut output.
THE coronavirus outbreak in China is making waves in global energy markets as it hits the Asian country’s energy demand. Since having emerged in December 2019, the virus is exacer- bating already difficult conditions in the global oil and LNG markets, which have been charac- terised by oversupply putting downward pres- sure on prices.
In response to the outbreak, China has effec- tively shut down parts of the country, with flights cancelled, motorists staying off the roads and factories closed for longer than expected follow- ing the Lunar New Year holiday. These efforts by Beijing to contain the virus are now reverberat- ing across the LNG market.
LNG spot prices were already low thanks to an unusually mild Northern Hemisphere winter, coupled with new liquefaction capacity contin- uing to come online in the US and elsewhere. At the start of last week, the Platts Japan/Korea Marker (JKM) LNG benchmark fell to a record low of $3.512 per million British thermal units ($97.14 per 1,000 cubic metres), half the spot market rate in October 2019, when the heating season started. And the downward pressure has continued, with India’s Reliance Industries Ltd (RIL) purchasing an LNG cargo via tender on February 5 at $2.80 per mmBtu ($77.45) and Reuters reporting two bids being placed for car- goes at similar prices.
Force majeure
On February 6, China National Offshore Oil Corp. (CNOOC), the country’s largest LNG importer, was reported to have declared force majeure on prompt deliveries from at least three suppliers. The move follows a Chinese international trade promotion agency saying last week that it would offer force majeure certificates to companies struggling with the coronavirus’ impact on their business to give to overseas partners.
It is perhaps the starkest illustration of the impact the coronavirus is having on Chinese LNG demand. It is also among the first known cases of the legal clause being invoked in com- modity contracts as a result of the epidemic.
According to a Reuters source familiar with the matter, CNOOC’s force majeure notice covers LNG purchased during Feb- ruary and March. In a separate report, Reuters cited a source who works for one of CNOOC’s LNG suppliers, and said his company had received a potential notice of force majeure last week. However, according to the source, his company’s legal depart- ment had found that, to be legally effective, the notice would need the backing of third- party official documents from local govern- ments declaring a full shutdown situation at LNG receiving terminals.
Image: Harvard University
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w w w . N E W S B A S E . c o m Week 06 12•February•2020