Power plants across North Asia are running at full tilt as the region braces for the early onset of winter, underpinning prices for the coal, gas and oil they need to churn out electricity. Commodity market analysts blame the La Nina weather pattern for the chill, with temperatures in Seoul and Beijing forecast to drop below levels typical for the time of year until year-end, while many parts of Japan have also been hit by colder conditions than usual.
La Nina, which tends to occur unpredictably every two to seven years, is characterised by unusually cold temperatures in the equatorial Pacific Ocean. It is seen as the opposite of the more famous El Nino phenomenon. That means power demand is growing as people crank up heating in their homes and offices, pushing producers and utilities to draw down coal, gas and oil stockpiles and increase imports.
Coal prices in Asia doubled over the past five months as China's imports surged on winter demand and as restrictions on domestic output led to shortages in China. It is also prompting oil refiners to make greater volumes of products such as kerosene, widely used in heaters in places like Japan, contributing to a 54 percent jump in Asia's oil refining margins in the past 1-1/2 months.
"La Nina has taken over El Nino, which means colder than expected winters ahead, not just this year, but likely in the next two years too," said Gordon Kwan, head of Asia oil and gas research at brokerage Nomura Holdings Inc. "We see high chances that fossil fuel prices like coal, oil and gas could spike further due to robust demand (and other factors)," he said.
A mild winter in early 2016 added to bloated oil, coal and gas stockpiles and dragged prices to multi-year lows. Robust winter demand has already driven Asia's liquefied natural gas (LNG) prices to the highest in a year. And state-run China National Petroleum Corp this week said it planned to boost total gas supply this winter by 9.5 percent versus the same period last year by increasing LNG imports by 54 percent on the year and drawing down stocks.
That will help meet a 3 million cubic metres a day rise in Beijing's demand as the temperature drops by one degree Celsius, CNPC said. "The short-term (LNG) story is quite positive from a pricing perspective," said Gavin Thompson, head of China research at commodity consultancy Wood Mackenzie. "Compared to where we've seen coal and gas prices in spring and summer, we'll see stronger growth (in prices) over the next three months."
Meanwhile, Chinese utilities have been desperately trying to overcome a shortage coal after Beijing took steps to curb local production as part of its 'war on pollution'. Although recent moves to loosen those restrictions could buoy local supply again. In South Korea, oil refiners expect forecasts of a long and cold winter to boost heating oil demand and support refining margins. South Korean utilities such as Korea East-West Power Co are running their fuel oil plants at full rates to keep up with demand.
Elsewhere, sales of kerosene in Japan were last week up 43 percent from the year before, Petroleum Association of Japan (PAJ) data showed, with the northern island of Hokkaido seeing its heaviest snow fall for the time of year in over three decades. Strong demand has reduced inventories, prompting refiners to run at full capacity and to maximize kerosene production at the expense of jet fuel, traders said.
Japan's coal imports between September and November are steady year on year and South Korea's coal imports are up slightly in October but down in November, trade flow data on Thomson Reuters Eikon showed. An official at Korea Western Power Co, who declined to be named citing company policy, said, "We have kept our coal stocks levels steady ahead of winter season...If power demand increases, we may have to buy extra fuel oil to meet winter demand."