Back in June, we reported that China had begun ramping up imports of U.S. LNG ostensibly in a bid to fulfill the January trade agreement with Washington and possibly avert another full-blown trade war.
According to Wood Mackenzie via NGI, China took in 10 LNG cargoes from U.S. suppliers between April and May at the expense of its traditional suppliers, including Turkmenistan and Uzbekistan.
But it's now emerging that the LNG purchases could have been a mere smokescreen.
Reuters has reported that China's imports of U.S. energy products, including crude oil, liquefied natural gas (LNG), and metallurgical coal, clocked in at just $1.29B through June, or a mere 5% of the $25.3B energy target.
The deal committed Beijing to purchase an extra $52.4 billion of U.S. energy supplies over the next two years from a baseline of just $9.1 billion in 2017. The deal requires China to import an extra $200B worth of American goods over the next two years.
But it's now abundantly clear that China intends to use the Covid-19 pandemic to abscond from fulfilling its end of the bargain--no doubt to the chagrin of the Trump administration.
Reuters has reported that whereas crude oil was supposed to feature prominently in the Phase 1 deal, China imported only 45,603 barrels per day (bpd) of U.S. oil during the first half of the year, or about half of 85,453 bpd it imported during last year's corresponding period.
Wood Mac's Sushant Gupta reckons that China would need to import 1.5 million bpd of U.S. crude in 2020 and 2021 just to fulfill its commitments. That figure has increased from 1,000,000 b/d thanks to the oil price collapse. Related: Russia's Largest Coal Mine Gets Unexpected New Owner
A surprising twist: Refinitiv's Emma Li says China ramped up its crude imports from the U.S. to 940,000 bpd in July and could hit an all-time high of 1.01 million bpd in August.
Unfortunately, swelling stockpiles coupled with narrowing refining margins are expected to crimp the pace of imports once again during the third quarter.
China's LNG imports from the U.S. fared much better, trebling to 878,754 tonnes through June compared to the same period last year thanks to robust household demand. However, weak natural gas prices mean that the value of those purchases only doubled compared to a year ago. EIA data shows that the U.S. exported 2,836,327 million cubic feet of natural gas and another 1,819,386 million cubic feet of LNG in 2019. The latest LNG import clip by China would mean it's absorbing nearly 5% of U.S. imports.
U.S. natural gas prices have surged 22% over the past week, touching $2.20/MMBtu for the first time since January after hotter-than-expected weather raised hopes that there will be a corresponding increase in cooling demand.
Unfortunately, higher natural gas and LNG prices could lead to dwindling exports from the Middle Kingdom.
Natural Gas Prices (Henry Hub) in USD per MMBtu
Source: Business Insider
Collapse of Phase One trade deal?
China will no doubt point to the adverse effects of Covid-19 as the reason why it's been unable to meet the terms of the deal. Related: Oil Prices Soar After EIA Reports Large Crude Draw
It's not like Chinese companies are strangers to declaring force majeure when it suits them: In early March, Kazakhstan revealed that Beijing had issued a force majeure declaration to state pipeline company KazTransGas (KTG) regarding its natural gas supplies. Consequently, import data published by Beijing revealed that Turkmen imports had declined some 17.2% during the first two months of the year. Uzbekistan's exports to China, of which gas is a major component, fell 35.4%. Meanwhile, China's largest LNG importer, China National Petroleum Corporation (CNOOC), and PetroChina also invoked force majeure clauses on various LNG suppliers, though the notice was rejected by Shell, Total, and Qatargas.
You can be sure Trump will not be buying it, either.
Back in May, Trump threatened to terminate the Phase One trade deal if China fails to buy an extra $200B worth of American goods and services.
"They took advantage of our country. Now they have to buy and if they do not buy, we will terminate the deal. Very simple. China doesn't want to see me elected," Trump ranted.
Bear in mind that Trump made those comments at the height of the Covid-19 crisis in China. You can bet he won't hesitate to make good on his threat if China continues to slack on its promises, especially now that the Covid-19 situation in the country has improved significantly.
By Alex Kimani for Oilprice.com
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Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. More
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