Last week we warned that the drop in Chinese petroleum consumption could spark one of the “biggest shocks to oil markets since the Lehman crisis.” Now it seems the fast-moving contagion has spread to liquefied natural gas (LNG) markets, Fitch Ratings detailed in a new report.
LNG markets in Europe and Asia could experience a shock as Chinese imports of LNG are expected to plunge. The hopes for a rebalanced market have been delayed thanks to the coronavirus outbreak.
The decline in Chinese energy consumption is a severe event risk that needs to be monitored.
Already, commodity spot prices and shipping rates have fallen, suggesting world trade growth could take a big hit in Q1.
LNG importers in China have announced they could cut 70% of seaborne imports in February. Tanker rates for LNG to Europe to the Asia Pacific to the Middle East to the Americas have dropped in the last 30 days.
Fitch notes that Chinese LNG imports account for 17% of global purchases in 2018 and 50% of global demand growth in 2016-2018. Any lapse in demand from China could be devastating for the global LNG markets and commodity-based economies.
Massive demand loss from China will weigh on spot natgas prices this year. It could lead to lower business activity and force some companies into a credit crisis.
The global LNG market was already oversupplied in 2019 amid additional output from Australia, Russia, and the US, which is coming at a time when the global economy is decelerating. Warmer weather in the US, Europe, and Asia has undoubtedly led to an uptick in gas storage. Spot prices for natgas have plunged 40% in the last three months.
Contagion could soon spread from declining commodity prices into the high yield debt markets, forcing spreads to widen.
With two-thirds of China’s economy shut down and no clear indication of when full production will resume, demand shock from coronavirus could tilt the global economy into below-trend growth.
As for the US gas boom, well, it’s already on its last legs with abundant supply and a falling rig count, which has contributed to an increasing number of firms with negative cash flows as spot prices stay low.
The coronavirus contagion is spreading across the energy sector. This won’t end well.