Amid signals that the U.S. and China have made some progress in trade negotiations in recent weeks, China has tentatively resumed buying U.S. commodities – something it had stopped doing during the peak of the trade dispute in the summer and fall of 2018.
China is now once again importing U.S. crude oil and soybeans, but despite increased inquiries, the Chinese market response to U.S. liquefied natural gas (LNG) is still tepid, S&P Global Platts’ Eric Yep writes in an analysis, citing traders.
“China will agree to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries,” the White House said after the meeting between U.S. President Donald Trump and Chinese President Xi Jinping at the G-20 summit in early December.
While a new summit between the two leaders is yet to be scheduled, the oil market has been recently buoyed by prospects of a trade deal between the world’s two largest economies. And the slow return of Chinese purchases of U.S. crude oil could be a positive sign in the trade talks.
The latest available EIA data shows that at the peak of the trade war in the summer, China totally cut off U.S. crude oil purchases in the months of August, September, and October. November saw a trickle of 8,000 bpd U.S. crude oil exports to China, while in December, Chinese imports averaged 97,000 bpd—up from November’s very small amount but much lower than the 510,000 bpd record imports in June 2018.
U.S. energy exports are “part of the mix, it may not be the driver, but it’s always hanging out there as part of the matrix,” U.S. Secretary of Energy Rick Perry said in an interview with CNBC at CERAWeek this week, referring to the energy exports as part of the trade talks.
“America now has the ability to use that in a very positive way when it comes to trade negotiations,” Secretary Rick added.
Some of the latest signals from ship-tracking data suggest that U.S. crude oil appears to be heading to China after many months of China abstaining from buying American oil despite the fact that it’s not on Beijing’s tariff list.
Still, a sustained return of U.S. crude oil exports to China will depend on two key factors—how the trade dispute plays out in coming weeks and months and how wide the Brent Crude premium over WTI Crude will be. The wider the spread, the more economical U.S. oil is for Asian refiners compared to Brent-linked grades. In recent weeks, U.S. crude for Asian refiners has also been more advantageous than Middle Eastern grades because the Dubai/Oman prices, off which the Middle East’s oil producers price their oil to Asia, are nearly $10 a barrel higher than WTI.
Total U.S. crude exports set a weekly record of 3.607 million bpd in one of the weeks in February and are expected to continue to grow.
Ben Luckock, Co-Head of Oil Trading at one of the world’s biggest trading houses, Trafigura, said at the CERAWeek conference this week that the U.S. would need China as a buyer in order to absorb the growth in exports over the coming years, so the trade dispute must end for the U.S. to find buyers of its soaring crude oil exports.
On the LNG trade front between the U.S. and China, things are a bit more complicated as China—the world’s fastest-growing LNG demand market—slapped a 10-percent tariff on U.S. LNG imports amid the heated trade tariff tit-for-tat last summer. Related: U.S. Aims To Bring Iran Oil Exports Below 1 Million Bpd
Between the start of the first U.S. LNG exports to the world in February 2016 and end-December 2018, China was the third-largest buyer of American LNG behind South Korea and Mexico, with a total of 62 cargoes accounting for 10.7 percent of all U.S. LNG exports, U.S. Department of Energy data shows.
The Chinese import tariff in September 2018, however, stalled American LNG flows to China in the second half of last year, according to data from Thomson Reuters ship tracking and the U.S. Department of Energy. So far this year, only one LNG cargo that left U.S. shores traveled to China, Reuters data showed earlier this week.
If the recent thaw in the trade dispute translates into a trade deal, it could create a win-win situation for both the United States and China. The U.S. will have a large export outlet for its increased LNG shipments which are expected to surge with more liquefaction and export projects coming online. And that export outlet will be the fastest-growing LNG market in the world, as China is betting on natural gas to switch away from coal-fired use in its efforts to curb pollution.
Last week, reports emerged that China’s biggest refiner Sinopec was preparing to sign a 20-year LNG supply deal with Cheniere Energy if the U.S.-China trade conflict gets resolved. Sinopec is also getting ready to buy U.S. LNG as soon as the Chinese government directs it to do so, Sinopec’s President Ma Yongsheng told Reuters last week.