Chinese energy futures sky-rocket amid global oil gains, domestic power crunch

Chinese energy and petrochemicals futures prices surged to multi-year and record highs on Monday, driven by gains in global oil prices and a domestic power shortage as the world's top coal consumer is facing tight supplies.

"In the near term, the supply shortage in coal pushed up the demand in crude oil and LPG, which are substitutes for coal, for power generation," said Huang Liunan, a Guotai Junan Futures analyst, referring to the global market including China.

The November crude oil contract on the Shanghai International Energy Exchange (INE) and fuel oil on the Shanghai Futures Exchange both gained by a fifth since September, reaching their highest since November 2018.

Liquefied petroleum gas (LPG) on the Dalian Commodity Exchange also jumped 4% to hit record highs on Monday, gaining a third in the last two months.

Gains in refined fuels were driven by a recovery in road traffic and air travel, Huang added.

"Starting from Q1 2022, we will see a steady increase in demand of jet fuel with the recovery of international traveling, boosting the price of energy-related products even further."

Aside from facing coal shortages, China's power industry is also under pressure from tougher emissions standards at a time when demand for power is strong.

Authorities have ordered two top coal regions to boost output and given coal-fired power utilities permission to charge customers higher prices.

Even so, Liaoning, the province with the largest economy in China's northeast rust belt warned on Monday of worsening power shortages despite efforts to boost coal supplies and manage electricity consumption.

Thermal coal prices on the Zhengzhou Commodity Exchange gained 60% last month, and were last up 8% at 1,408.20 yuan ($218.77) per tonne.

Chinese energy traders expect coal prices to remain strong in coming months.

"I don't see prices weakening in the fourth quarter," said a Shanghai-based energy products trader. "I think energy prices including crude oil will only weaken next year."

Prices of petrochemicals like methanol and ethylene glycol have also surged, tracking gains in coal and crude oil.

Futures prices of methanol - which can be used as fuel - on the Zhengzhou exchange are up 43% since the start of September and gained 8% on Monday to hit a three-year top.

Meanwhile, ethylene glycol prices on the Dalian exchange rose 6.5% to record highs, having gained over a third since the start of September. The recent power shortages have hit production of the petrochemical, which is an industrial compound found in many consumer products ranging from antifreeze to solvents and paints.

"For industrial enterprises, when you limit power, you limit production," said an analyst who declined to be identified, noting recent plant production curbs in Zhejiang and Jiangsu provinces.

"Under the environment of energy consumption and intensity controls, there is less expectation that new production units will be commissioned."

($1 = 6.4370 Chinese yuan renminbi)

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