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Oil Industry Spending To Drop By $100 Billion This Year

Oil Bulls Are In For A Bitter Disappointment

For those still busy hedging on the spread of the coronavirus, a more sustainable threat to energy investments continues with the disappointingly dull impact of the much-lauded ‘Phase One’ trade deal between Washington and Beijing. 

In a few days’ time, China is set to halve tariffs on $75 billion of imports from the United States, reciprocating a similar move by its western counterpart as part of an interim trade deal. The reductions will come into force on February 14 at 1:01 p.m. local time (05:01 GMT) and will see punitive tariffs for some 1,717 types of US goods lowered from 10% to 5% on some goods and from 5% to 2.5% for others.

Unfortunately, U.S. energy producers that are looking forward to a financial windfall by boosting exports to China could be in for a big disappointment.

That’s because the pathway for renewed deliveries of key energy commodities such as LNG from the U.S. to China remains unclear weeks after a "phase one" trade deal was struck. 

The revelation adds another blow to the battered energy sector, with natural gas prices recently plunging to a decade-low of $1.79/MMBtu--the lowest nominal Henry Hub price since 1998--with the U.S. gas market 2-3 Bcf/d oversupplied. 

Source: Business Insider

Energy Exports Decline

The phase one deal included a pledge by China to make $52.4 billion worth of additional energy purchases including crude oil, LNG, refined products and coal across the next two years. However, it did not give a breakdown of specific product purchases.

Tariffs for U.S. crude oil, which was first targeted in September, will be lowered to 2.5% from 5%. 

There is really no clear indication yet as to whether this reduction will boost flagging exports.  

U.S. exports of crude oil to China, the world’s biggest crude importer, hit a record high in 2018. In 2019, however, they were nearly halved to 6.35 million tonnes, with zero imports in December as the trade war between the world’s two largest economies dragged on. Related: OPEC’s Oil Production Plunges, But It May Not Be Enough

But what’s particularly discouraging is the LNG situation.

Imports of the super-chilled fuel from the U.S. clocked in at just 258,955 tonnes in 2019, far lower than the 2.15 million tonnes imported in 2018. That represents a tiny fraction of China’s total LNG imports of 60.25 million tonnes during the year. 

No LNG imports from the U.S. have been delivered to China since March 2019, with China's 25% retaliatory tariff on U.S. LNG staying in place through the trade deal. 

As Ken Medlock, senior director of the center for energy studies at Rice University's Baker Institute for Public Policy, told S&P Global, it’s highly unlikely that other LNG suppliers will be willing to relinquish market share for the sake of a U.S.-China trade deal. Unless China removes or lowers the 25% tariff it slapped on U.S. LNG in June 2019, it’s going to be a tough call for Chinese gas buyers to purchase more of the commodity.

Further, most of China's LNG imports are under long-term contracts with China trying to diversify its LNG imports from sources other than the U.S., such as Australia, Russia, Qatar and Mozambique.

Beijing will also likely not be in a hurry to buy more energy products from the US simply because it’s not going to be under much pressure to do so. 

During the trade negotiations, Washington failed to make specific reference to China's compliance with an aggressive commitment to purchases of U.S. commodities, including energy products such as LNG, and did not highlight imminent plans for "phase two" negotiations. This gives the country plenty of leeway.

Propane Receives a Tariff Boost

While the LNG outlook is not good, some industrial commodities are likely to receive a substantial tariff boost.

On top of the list is propane, after Beijing scrapped an additional 5% tariff on propane shipments from the US. China imports propane from the US and other countries and turns it into petrochemicals such as propylene. US propane exports tumbled from 1.5 million tonnes in 2018 to just 2,443 tonnes last year.

The same can, however, not be said for methanol, ethylene glycol (MEG).

In June 2019, China imposed tariffs of 25% on US methanol and MEG; unfortunately, they were not affected by the Jan 15, 2020, deal. China imported only 75,118 tonnes of methanol from the US in 2019, down from 109,000 tonnes bought the previous year.  Meanwhile, US MEG exports to China clocked in 69,600 vs.147,890 tonnes purchased the previous year. These were just a tiny part of China’s total methanol and MEG imports of 9.7 million tonnes 9.03 million tonnes, respectively, over that timeframe.

By Anes Alic for Oilprice.com

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Anes Alic

Anes Alic is a veteran investigative journalist and writer whose work in everything from anti-terrorism and high-level politics, to industry, investing and IT has won… More

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