- China's targeting of natural gas and oil products for tariffs is a special rebuke aimed at U.S. officials who had pushed energy products as a way for China to narrow its trade gap with America.
- Signs that China is cutting back on oil imports weakened crude prices Wednesday but will not derail the longer term outlook for robust U.S. energy exports.
- The U.S. export business is growing rapidly. Oil exports could grow by a million barrels a day annually over the next five years and liquified natural gas exports could more than double by 2020 to 9 billion cubic feet a day from 4 billion cubic feet, according to Citigroup.
The U.S. in the next five years will become an energy exporting powerhouse — rivaling Saudi Arabia in oil exports and growing into one of the world's largest gas exporters, regardless of its trade spat with China, analysts said.
China slapped tariffs on a range of oil products, liquid petroleum gas and coal, as well as threatened to tax U.S. liquified natural gas, a stinging rebuke since U.S. officials had pushed burgeoning U.S. energy exports as a way for China to trim its huge trade surplus.
China this year imported 20 percent of America's still small but growing crude oil exports, which totaled 1.76 million barrels a day through June, according to Citigroup analysts. It also bought 0.4 billion cubic feet a day of the 2.77 bcf/d liquefied natural gas, exported by the U.S. this year.
Crude oil futures fell sharply Wednesday amid concerns that Chinese demand for oil imports is slowing after the latest import data, and as it slapped a new round of tariffs on U.S. products. While its crude imports recovered slightly in July, imports had fallen in the previous two months and July's numbers were still among the lowest this year after a drop-off in demand by China's smaller independent refineries.
West Texas Intermediate futures lost 3.8 percent to $66.50 per barrel.
Chinese imports of crude for July were up slightly from June at about 8.48 million bpd, up from 8.18 million bpd a year ago, and June's 8.36 million bpd, according to data from the General Administration of Customs. China did not explicitly cite crude oil in its latest list of tariffs on $16 billion in goods, released Wednesday, but it listed a whole range of refined products and fuels, heavy oils and petrochemical products.
"One knee-jerk reaction that is almost certainly wrong is that China's rejection of US imports poses a significant challenge to US exports. Whether in the long- or short-run, China's potential imposition of tariffs or quotas on US exports is a tax on Chinese consumers rather than an obstacle to US exports," Citigroup energy analysts wrote.
Goldman Sachs analysts said Chinese imports of U.S. oil are down 70 percent in April through June, but they do not expect the tariffs to change the outlook for U.S. energy exports.
"Absent a major impact on global growth and hence energy demand, however, we believe that such tariffs are unlikely to derail the outlook for US energy exports with global markets, requiring more US exports in coming years," Goldman analysts wrote.
The decline in Chinese imports was not really a surprise. "Sinopec has pulled back from buying U.S. crude oil," said John Kilduff of Again Capital. He said a decline in purchases by China's biggest oil company has also already showed up in slightly lower U.S. weekly exports of crude.
But that should not impact U.S. exports, he said. "It's like a gold rush to do it. The oil we produce in the Permian can't all be used in the U.S. It has to go abroad."
China's snub of U.S. products has been having an impact on the market temporarily and even before some tariffs went into effect.
"Crude oil and LNG markets are facing similar problems as soybeans, almonds and corn, with short-term bearish impacts," the Citi analysts said. "As China Inc. turns away its rising wave of hydrocarbons imports from the US, prices are being hit. The dislocation is an inevitable result as Chinese buyers look elsewhere given uncertainties on pending 25% tariffs on imports from the US."
They point out that China is cutting off its LNG imports from the U.S. at the weakest time of year for LNG demand, unlike winter when demand can surpass available supplies by 6 to 8 bcf/d. China was expected to be a big buyer of U.S. LNG in the winter, and it has also become a major buyer of U.S. condensates and natural gas liquids, which are petrochemical feed stocks.
By 2020, Citi expects U.S. LNG exports to rise to around 9 bcf/d as available gas resources in the U.S. are also expected to increase. "By 2025, Citi expects the US to be a 100-mt [metric ton] exporter (13-bcf/d) along with Russia and Qatar, with pure market pricing and no destination restrictions, making it increasingly attractive regardless of Chinese trade policy. For oil, US exports could grow by ~1-m b/d annually for at least the next five years," the analysts wrote.
Growth of 1 million barrels a day in crude alone each year would put U.S. exports at about 6.8 million barrels a day, near the 7 million barrels a day exported by Saudi Arabia last year.
Saudi Arabia also exported 1.4 million barrels a day of crude products. The U.S. last week exported 1.9 million barrels a day of crude oil and more than 5 million barrels a day of oil-related products, including 1.2 million barrels a day of diesel fuel, according to the latest U.S. government data. Exports had been exceeding 2 million barrels a day in the weekly day recently.
Citigroup analysts say that the concern is that the dependability of U.S. supplies would be cast in doubt because of the tariff wars. "But so long as the US places no barriers on exports of its own, placing such barriers on exports by importing countries would be potentially self-defeating. This coming winter for example, China is likely to be short on both LNG and soybeans, two US commodities on which it has placed barriers," they note. "Would Beijing continue to tax its own citizens with a 25% (or any other level) tariff?"