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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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China-U.S. Ceasefire Paves Way For New LNG Projects

News broke on Saturday that the U.S. and China had reached a ceasefire in its ongoing trade war after President Trump met with Chinese President Xi Jinping at the G20 summit in Argentina.

According to the White House, the U.S. will still keep in place $200 billion of tariffs on Chinese imports but will not increase those tariffs from 10 percent to 25 percent after the start of the year as originally planned. The deal will also keep, at least for now, Trump from placing another $267 billion worth of Chinese goods under tariffs.

Both sides will immediately hold talks on structural changes concerning forced technology transfers made by Chinese firms on U.S. companies, intellectual property rights protection, non-tariff trade barriers, cyber intrusion concerns, cyber theft and agricultural, the White House added.

Washington and Beijing said they will try to achieve a permanent deal within the next 90 days, however the U.S. still has significant leverage, stating that if a formal deal can’t be reached then it will hike tariffs from 10 percent to 25 percent, which could roil global stock markets, stagnate global economic growth, dampen oil demand growth and possibly lead to a recession across the globe, particularly in emerging economies.

Chinese State Councilor Wang Yi told reporters, “The two presidents agreed that the two sides can and must get bilateral relations right.”  He added that negotiations were held in a “friendly and candid atmosphere.”

China, for its part, also agreed to offset its massive trade imbalance with the U.S. by buying more, but not yet specified amounts, of energy products, agricultural, industrial and other products. “China is willing to increase imports in accordance with the needs of its domestic markets and the people’s needs, Wang said, “including marketable products from the United States, to gradually ease the imbalance in two-way trade.”

Significant take-aways

There are several significant take-aways from this development, including the argument that Trump’s hard line, even at times belligerent stance with Beijing, has caused them to blink first, particularly since economic growth in China has already started to feel the brunt of U.S. tariffs, while U.S. economic growth, though not as robust as a few months ago, is still strong.

Another significant take-away from the preliminary agreement could be its impact on energy markets, both U.S. oil import to China and perhaps even more importantly from a development perspective liquefied natural gas (LNG) imports. While neither of these two energy products were mentioned by name, it’s likely that China would not only appease the U.S. by removing tariffs on U.S. LNG imports but would also help itself since Beijing needs the diversity of supply that growing U.S. shale oil and gas exports offer. Related: LNG Prices Are In A Tailspin Due To Warmer Weather

Yet, LNG is the energy development to watch as the two sides try to hammer out an agreement. China has placed a 10 percent tariff on U.S.-LNG imports with the threat of increasing that figure in the future, resulting in China having to find alternate sources of the super-cooled fuel on the spot market. The downside for China is that it also needs U.S. sourced LNG as its insatiable gas demand expands amid Beijing's mandate that gas make up at least 10 percent of its power generation energy mix by 2020, with further earmarks set for 2030.

LNG is the prize

The U.S. LNG sector also needs Chinese participation, however. Many of the so-called second wave of U.S. LNG projects that are now being planned and/or receiving federal approval will have a difficult time reaching the all-important final investment decision (FID) needed to go forward without Chinese assistance. These projects not only need to sign long-term off-take agreements with Chinese entities, but many of them, particularly newcomers not backed by more experienced oil and gas majors, will need Chinese financing to go ahead.

While it remains to be seen if Washington and Beijing can iron out their trade differences, it would be beneficial for both sides’ energy sectors to at least reach some sort of deal that would allow the free trade of energy between the two super powers. At the end of the day, two realities remain: the U.S. is now an energy (oil and gas) producing super power alongside the ranks of Russia and Saudi Arabia, while China, conversely, is the world’s largest energy consumer, which gives it less leverage in ongoing trade and even geopolitical negotiations and developments.

By Tim Daiss for Oilprice.com

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Leave a comment
  • Bob on December 03 2018 said:
    Exactly, a deal on LNG is key to solving the trade war between China and the US, a solution that is easily at hand, as the article states, with China as the world's largest energy importer, and US now an energy super power.

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