U.S. energy exports to climb as China pledges ramp-up in purchases

NEW YORK/SINGAPORE (Reuters) – U.S. energy exports to China, mostly crude oil and natural gas, will climb as the world’s two largest economies struck a trade agreement after a more than year-long tariff war, executives and traders said on Wednesday.

The accord did not specify quantities of the products. Energy executives and analysts welcomed the deal after liquefied natural gas (LNG) and crude exports to China largely dried up last year, but said plenty of uncertainties remained. Market reaction was mixed with oil trading lower and U.S. stock indexes higher.

China committed under the deal to add at least $52.4 billion in energy purchases over two years, from $9.1 billion in 2017. This amounts to $18.5 billion more in 2020 and another $33.9 billion next year.

The agreement “is a step in the right direction that will hopefully restore the burgeoning U.S. LNG trade with China,” said Jack Fusco, chief executive of Cheniere Energy Inc (LNG.A), the largest exporter of U.S. gas. Fusco attended the ceremonial signing at the White House.

Despite China’s withdrawal from most U.S. LNG purchases last year, U.S. sales to other Asian countries, Europe and Latin America still drove the United States to become the world’s third-biggest LNG supplier in 2019, behind Qatar and Australia.

In crude, China may increase its imports to 500,000 barrels per day (bpd) in 2020 and 800,000 bpd in 2021, analysts at Goldman Sachs said in a Jan. 10 report. It also said LNG imports could hit 10 million tonnes this year and 15 million next, valued at $38.2 billion combined.

Traders including Vitol SA [VITOLV.UL] and Trafigura AG [TRAFGF.UL] provisionally chartered four to eight supertankers to load U.S. crude for China this month and next, data from Refinitiv, Kpler and Vortexa showed. The companies declined to comment.

One Singapore oil trader said economics favor U.S. crude as freight rates are dropping and rising shale production has U.S. crudes selling at a discount to international Brent. But he warned that the price window “is really tricky as it can open and shut within days.”

A shale boom propelled the United States to rank as the world’s largest producer of crude and natural gas, with China’s purchases of U.S. crude and LNG surging, before the trade dispute flared.

Analysts, U.S. energy trade executives and Asian buyers said demand, pricing and transportation costs would determine whether exports over two years hit the $52.4 billion mark.

“We are in uncharted territory here; quota sales are not the norm,” said Sandy Fielden, an energy analyst at financial services firm Morningstar.

Tariffs will remain on many products the two countries sell to one another, including LNG. China imposed a 25% tariff on LNG, crimping most activity with the United States.

“We have to have some sort of clarity around how China is going to either exclude the tariffs that are currently in place against LNG or ultimately lift them before we start to see a real sort of sizeable amount of U.S. LNG finding its way to China,” said Charlie Riedl, executive director of trade group Center for LNG.

“The purchases would require China to buy the bulk of U.S. exports and China’s refineries are also not currently set up for light U.S. oil,” said analysts at research firm Capital Economics.

China’s share of total U.S. crude exports dropped from over 20% in the first half of 2018 before the trade war to nearly 6% in the first half of 2019.

The United States exported about $5.4 billion worth of crude to China in 2018, but the value of those shipments slid to just $2.6 billion in 2019 through October, according to data from the U.S. Census Bureau and the Energy Information Administration.

“This is a good first step in removing barriers with one of our most critical trading partners,” said Derrick Morgan, a senior vice president at trade group American Fuel and Petrochemical Manufacturers (AFPM).

“We hope this will be the first in a series of steps to open a key market for American exports of all kinds – including energy and petrochemical products, which still are in need of tariff relief,” he added.