What happens to world markets when China buys an additional $50 billion-plus in U.S. energy products over the next two years?
For some analysts, as spectacular as this may sound to fossil fuel bulls, at best, it’s unrealistic.
After months of negotiations, the United States and China have finally agreed to and signed a phase-one trade agreement between the world’s two largest economies.
The agreement would see China purchase billions of dollars’ worth of oil, coal, and LNG, to the tune of $52 billion—a scenario that if fulfilled, would change the course of the world’s energy landscape forever.
The agreement, which analysts prefer to call a ‘trade truce’ because it does not address any of the major underlying issues that started the trade war in first place, is a step toward resolving differences that has eaten into US energy-product exports to China.
The agreement calls for an increase in the exports of the world’s number-one crude oil producer, the United States, to the world’s largest crude oil importer, China. The phase-one agreement is also intended to significantly raise U.S. exports of liquefied natural gas (LNG) to China, which had dwindled after China slapped tariffs on U.S. LNG imports and stopped altogether after April 2019. U.S. coal exports could also see a jump to China, if Beijing makes good on its promise to increase its imports of U.S. energy products by billions of U.S. dollars over the next two years.
Under the phase-one deal, China is set to buy this year no less than US$18.5 billion worth of U.S. energy products above the 2017 baseline, and no less than US$33.9 billion above the corresponding 2017 baseline in 2021.
This is an additional US$52.4 billion worth of U.S. energy product flows from the United States into China in 2020 and 2021 above the levels of Chinese imports of energy back in 2017, before the trade war began and before the two biggest economies started slapping tariffs on each other’s goods. Related: How Important Is The Suriname Oil Discovery?
That’s a big ask.
Analysts believe that China’s pledge to buy so much more U.S. energy products is unrealistic and challenging for Beijing, even if its intentions are to stick to this deal.
A Global Impact
If China were to buy so much more additional U.S. energy products, the world’s flow of crude oil, LNG, and coal would shift, as Reuters columnist Clyde Russell notes.
For now, China still has tariffs on imports of U.S. crude oil and LNG, which could dampen the prospects for US to China crude flows. Beijing has not eliminated a 5-percent tariff on crude oil imports from the U.S. in the phase-one trade deal, nor has it removed a much steeper, 25-percent tariff on US LNG imports.
If China were to keep its end of the bargain in the phase-one trade deal, it would have to more than double the volume of imports of U.S. crude oil and LNG from the monthly records in recent years, Reuters’ Russell has estimated.
The record month for Chinese imports of U.S. crude oil was March 2018, which saw a total of 14.5 million barrels ship, but things have cooled down since then, falling to 6 million barrels as of last September.
The record monthly volume of LNG imports from the U.S. was set in October 2017, as per Energy Information Administration (EIA) data, at 24.6 million cubic feet for the month. But from May to October 2019, no US LNG made its way to China.
If China were to double these record monthly volumes and sustain them for the whole of 2020, it could come at least close to fulfilling its pledge for a huge boost in imports of U.S. energy products.
However, even with government-mandated purchases of U.S. oil and gas, China will find those targets challenging to achieve because the trade of energy products on the global market is also dictated by market forces and prices, especially for U.S. oil producers.
The Chinese tariffs on U.S. crude oil and LNG still in place are one of the factors likely to limit immediate boosts in China’s imports of American oil and gas. Related: Why Oilfield Service Giants Are Dumping Assets
While the American Petroleum Institute (API) applauded the phase one trade deal, it called for the U.S. to work to eliminate all energy related tariffs.
“We encourage the administration to stay at the negotiating table until the U.S.-China marketplace for energy trade is fully restored and all remaining tariffs are lifted — including U.S. tariffs on imports of industrial components used in our industry and Chinese retaliatory tariffs on U.S. energy exports,” API President and CEO Mike Sommers said in a statement.
U.S. crude oil exporters will have to compete with other major exporters for a piece of the Chinese market, which they had just started to win over, before losing China as a major buyer in the most heated periods of the trade war.
Russia and the Middle East
Russia and oil suppliers from the Middle East will fight tooth and nail for their prized export market in Asia. The proximity of the Middle East and Russia will also make U.S. crude oil sales on China’s market more challenging, because shipping costs are higher and the arbitrage needs to be open for U.S. crude oil flows to China.
“For China to massively increase imports of oil and LNG from the US while tariffs remain in place, is going to be challenging,” Wood Mackenzie’s Asia Pacific Vice Chair Gavin Thompson said last week, commenting on the phase one deal.
If China is to significantly boost its LNG imports from the U.S., the 25-percent tariff will have to be either absorbed by the importing company or passed through to the consumer.
“We expect that Chinese national oil companies will be reluctant to commit to large-scale purchases given this. At the same time, the next two years will also see a slower pace of gas demand growth in China, rising domestic production, and the arrival of Russian pipeline gas, creating a more competitive gas market,” Thompson noted.
Qatar and Australia
Furthermore, Qatar and Australia will be America’s competition in LNG supply both in China and in other markets. Qatar and Australia are geographically better positioned than the U.S. on the Chinese market. But if China buys significantly more LNG from the U.S. at the expense of Australia and Qatar, those two LNG exporters would go after other Asian LNG markets and also the European markets, where the U.S. has boosted LNG supply recently.
The flows of global crude oil and LNG could be upended if China manages to reach its purchase commitments in the phase one trade deal. But right now, this looks like a very big ‘if’.
By Tsvetana Paraskova for Oilprice.com
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The important thing is that a continued improvement in the trade relations between the United States and China in 2020 will lead to a faster depletion of the glut in the market and that will be the biggest bullish influence on global oil demand and prices.
Another bullish influence is the continued slowdown of US shale oil production. Despite all the hype, US shale oil production as reported by the US Energy Information Administration (EIA) is overstated on average by at least 2 million barrels a day (mbd). Therefore, US oil production in 2019 averaged 10.3 mbd and not 12.3 mbd as EIA claimed. US production in 2020 is projected to be 10 mbd or less.
US oil exports of LNG and crude oil to China are minuscule compared to imports from Russia, Saudi Arabia and Iraq. The Chinese economy being the world’s largest based on purchasing power parity (PPP) and growing at a healthy 6.1% compared to 2.1% for the US and 1.5%-2.0% for the European Union (EU) is capable of absorbing US energy exports and much more from around the world. Just remember that China broke all previous records in crude oil imports when it imported 11.76 mbd of crude in the last quarter of 2019.
Still, US energy exports to China will have to compete with the superpower of energy, Russia in oil, gas and LNG exports and with Qatar and Australia in LNG.
Moreover, Russia and not the US is the world’s largest producer of crude oil producing 11.23 mbd in 2019 despite the restrictions of OPEC production cuts compared with a realistic figure of 10.3 mbd for the US. That is if we deduct the hype.
In conclusion, whatever the size of US energy exports to China, they will hardly impact global oil demand provided the truce between the two countries continues into the 2020 and beyond.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London