|12 February, 2020

Coronavirus pushes wobbly LNG market to the edge

Prices of the main benchmark used in Asia fell to just over $3 per million British Thermal units last Wednesday – a record low – from well over $5 before the crisis

The ultrastructural morphology exhibited by the 2019 Novel Coronavirus (2019-nCoV), which was identified as the cause of an outbreak of respiratory illness first detected in Wuhan, China, is seen in an illustration released by the Centers for Disease Control and Prevention (CDC) in Atlanta, Georgia, U.S. January 29, 2020. Alissa Eckert, MS; Dan Higgins, MAM/CDC/Handout via REUTERS.

The ultrastructural morphology exhibited by the 2019 Novel Coronavirus (2019-nCoV), which was identified as the cause of an outbreak of respiratory illness first detected in Wuhan, China, is seen in an illustration released by the Centers for Disease Control and Prevention (CDC) in Atlanta, Georgia, U.S. January 29, 2020. Alissa Eckert, MS; Dan Higgins, MAM/CDC/Handout via REUTERS.

REUTERS

NEW YORK - It’s never good when companies start speaking in legalese. China National Offshore Oil Corporation, the country’s leading liquefied natural gas importer, has invoked the legal clause force majeure – which would allow it to suspend contracts because of the deadly coronavirus. China – the world’s second largest importer of LNG – has been responsible for much of the product’s demand growth, meaning the woefully oversupplied market could be in serious trouble.

Even before the virus, the LNG market was wobbling. Prices of the main benchmark used in Asia fell to just over $3 per million British Thermal units last Wednesday – a record low – from well over $5 before the crisis. The last time the price dipped below $4 was July 2009. A warmer winter in China reduced demand even as product from the U.S. and Australia kept supply robust. If counterparties start to get antsy about the legal position of their contracts, things would get even worse.

CNOOC’s use of force majeure is probably a long shot. The legal clause is normally invoked when a company can’t fulfill an obligation because of something completely uncontrollable – like natural disasters or civil unrest – not low demand. Unless quarantines make it physically impossible for Chinese importers to accept gas, the legal case looks far from watertight.

The French energy giant Total indicated as much on Thursday. It rejected a force majeure claim from an unnamed Chinese LNG importer, saying it would be “contradictory” for a firm to invoke such a clause on long-term contracts while trying to buy product in the less expensive spot market. Relationships between parties in this market take years to develop, so Total’s claim is questionable. And there has been no real evidence of this type of activity in the spot market.

As such, CNOOC could just be really struggling. The Chinese firm is huge – it has contracts for roughly 20 million metric tons of LNG a year – so suppliers likely wouldn’t want to damage this lucrative relationship. So firms like Total might consider giving CNOOC more time to fulfill its contracts, instead of setting a precedent involving force majeure. Even then, adding practical uncertainty to a market already suffering from historically low prices could take LNG into terra incognita.

CONTEXT NEWS

- China National Offshore Oil Corporation has declared force majeure with at least three suppliers of liquefied natural gas because of the coronavirus, Reuters reported on Feb. 6. This legal clause enables a company to suspend its obligation to fulfil a contract because of unforeseen events, like strikes, natural disasters or wars. The notice would cover the energy giant’s LNG purchases for February and March, according to Reuters.

- Reuters quoted industry sources who said CNOOC’s main suppliers are Royal Dutch Shell, Total, Woodside Petroleum, and Qatargas.

- A Total executive said the company had rejected a force majeure notice from a Chinese LNG buyer on Feb. 6. It did not disclose the name of the buyer.

- Platts Japan Korea Marker is the LNG benchmark price used for spot physical shipments in Asia. It was around $3.15 per million British Thermal units on Feb. 5.

- The death toll from a coronavirus outbreak in mainland China had risen to 908 as of the end of Feb. 9, the National Health Commission said on Feb. 10.

(Editing by George Hay and Katrina Hamin)

© Reuters News 2020

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