Analysts expect Australian liquefied natural gas (LNG) supplier Woodside (ASX:WPL) to benefit as China faces a severe winter of energy shortages, with primary energy demand surging to a 10-year high.
“Exceptional demand growth and supply constraints have led to energy shortages in China, which are clearly playing out in gas and power markets. Lower than normal inventories of coal and possibly gas suggest that we have not seen the worst. Moreover, similar issues in Europe suggests a more widespread problem for markets. Much will depend on just how cold this winter is, although the omens don’t look good. In the short term, expect higher prices, although given the inextricable link between energy and economic growth, shortfalls in energy supply will clearly result in slower economic growth,” warned analysts at investment research firm Bernstein.
Sectors that will benefit from the energy crisis include energy producers with exposure to spot coal, gas, and oil prices. Bernstein said its top pick in Asia Pacific for gas would be Woodside.
“For investors, the upside of energy shortages will be through unregulated producers of coal and gas. Playing such a theme through Coal China or PetroChina (HK:857) is complicated by regulated prices and import losses,” said the firm.
Instead, global names such as Woodside (ASX:WPL), Gazprom (MCX: GAZP), Equinor (NYSE: EQNR) and Cheniere (NYSE:LNG) are more obvious ways to gain exposure to higher spot gas and LNG prices. “We also see upside for LPG/NGL players as demand for LPG grows, with US names among the more obvious listed beneficiaries. Winners are also solar, wind, energy storage and hydrogen companies, where greater investment is needed to accelerate low carbon supply,” Bernstein said in a note today.
In China, this year, there has been exceptionally strong demand for oil, gas and power. Bernstein believes that primary energy demand may have increased by as much as 4.8% in 2021, based on an estimated 8% growth in oil demand, 13% growth in gas demand and 4% increase in thermal coal demand (which make up 85% of the energy mix).
Energy supply has clearly not kept pace with demand. “For gas, demand has increased by 16% for the first 8 months while domestic supply has grown at around 7%, resulting in gas imports rising by 22% and LNG imports increasing by 30%. This has helped contribute to the worldwide deficit in gas inventories in Europe and Asia as we come into the winter period. For coal, thermal power consumption is up 14%, but domestic supply of coal is up less than 5% and coal imports have declined 15%, on a ban on Australian coal and weaker exports of coal from Indonesia due to COVID related issues which have reduced output,” reported Bernstein.
“As a result, coal and gas inventory levels are at multi-year lows. In Europe, gas inventories are about 70% of where they were last year, while coal inventory levels are at 5-year lows. Consequently, coal and gas prices are at multi-year highs around the world and could go higher in the short-term depending on the severity of the winter. Higher prices for gas and coal are also now sending ripples out into the oil market where industrial and residential consumers are switching back into LPG and fuel oil at the margin,” added
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