Eye on Energy: China’s Great Nat Gas Deal

China and Australia struck a $41 billion agreement to provide China with liquefied natural gas (LNG) Tuesday, and the deal is an example how China is grabbing up energy at cheap prices at a time when it is one of the few countries investing in resources, experts told CNBC Asia.

Meanwhile, opinion was divided on just how troubling is the American Petroleum Institute’s surprising report that U.S. crude oil inventories fell last week.

PetroChina will pay Exxon Mobil $50 billion Australian dollars for 2.25 million tons per year of LNG supply for 20 years. Exxon will supply the gas from the Gorgon LNG project off Australia’s northwest coast.

“China is buying at bargain basement prices,” Mark L. Waggoner, president of Excel Futures, said. “They are protecting their interests. Expect more crude oil purchases as well ... demand is on the rise in China and prices will start to go higher once again.”

Mike Sander of Sander Capital Advisors agreed, saying that China is position itself for growing demand, when more of its population starts driving.

“Either PetroChina could sell the goods at home or resell it in the spot LNG market should prices climb as they may be assuming,” RGE Monitor Senior Analyst Rachel Ziemba said. “But it just underscores the fact that China continues to be one of few capital sources for energy investment right now. Agreeing to pay for these supplies may be what is needed to bring this project into action.”

“This is further evidence that China is out there buying all of the ‘stuff’ it knows it shall need in the future and taking perhaps more than is merely necessary,” Dennis Gartman, publisher of The Gartman Letter, said.

API an Aberration?

The API reported Tuesday that crude inventories in the US fell by 6.1 million barrels, while analysts were looking for a rise in stockpiles of 1.3 million barrels.

Natural Gas
Natural Gas

Imports fell 1.03 million barrels a day to 8.88 million barrels a day, while domestic production was unchanged and refinery runs rose, according to JP Morgan.

“This worries, me,” Phil Flynn, senior analyst at PFG Best Research, said. “Imports were down big and oil rallied strong into the number.”

But the API numbers should be viewed with some skepticism, as they do not include inventories from Valero Energy, Excel’s Waggoner said.

“We think that the draw is an aberration and the bump up will be erased once (the Department of Energy) report is published. A great short for overnight.”

“A drop of 6.1 million barrels of crude is a very large ‘aberration’ from the expected (Energy Information Administration) report,” Sander said. “With poor unemployment and corporate growth in the US I am still looking for crude and petroleum to have very weak consumption for the foreseeable future. It is still the summer so there could be a small drop, but I would give it a better bet for a build each weak.”