US energy, sanctions could be key topics at US-China talks: analysts

US President Donald Trump is planning to discuss China's purchases of Russia's oil during his upcoming meeting with Chinese President Xi Jinping, but analysts disagree on the role oil and gas will play in a possible US-China trade deal.

Trump is departing on Oct. 24 for his trip to Asia, and will meet with Xi on Oct. 30. Trump said Oct. 22 that he plans to speak to Xi during their meeting about China's purchases of Russian oil.

The US imposed sanctions on Russian oil companies Rosneft and Lukoil late Oct. 22, while the EU adopted its 19th sanctions package against Russia on Oct. 23, including Rosneft and Gazprom Neft on its full transaction ban list.

"I cannot imagine China's purchase of Russian oil being part of a trade deal," Henrietta Levin, a senior fellow at the Center for Strategic and International Studies, said during an Oct. 24 webinar hosted by CSIS.

Beijing's position has always been that its economic relationship with Russia is part of normal state-to-state relations and that it is within its sovereign authority to set its own foreign policy, Levin said.

"Might Trump claim that as part of a deal? Maybe," Levin said. "But I would view that with skepticism, because Beijing has been so consistent in defending its bilateral relationship with Russia."

According to sources, China's independent refineries are likely to maintain their purchases of Russian crude oil despite escalating Western sanctions, driven by limited alternatives and established supply relationships.

Even if Russian oil is not addressed, energy could still be a part of a deal between Trump and Xi.

Rapidan Energy Group said in a recent note that China could pledge to buy more US oil and gas as part of an agreement.

The Rapidan note said that in addition to reduced tariffs and measures on fentanyl, a US-China deal could also include $200-$300 billion in new Chinese purchases of US goods, including aviation, energy like crude and LNG, and agricultural goods.

Inclusion of US oil and gas would be consistent with past deals, Kevin Book, managing director at ClearView Energy Partners, told Platts, a part of S&P Global Energy.

"The history of this is the administration has put US oil and gas on the table for recent trade deals and the Phase I trade deal with China in 2020," he said Oct. 24.

Secondary sanctions

China's willingness to reduce purchases of Russian oil is expected to depend on the willingness of the US to impose secondary sanctions on companies that do business with the recently sanctioned Rosneft and Lukoil, analysts say.

"The Trump administration's best bet is to make a few high-profile examples of sanctions enforcement, while simultaneously promising China and India that they will not be cut off from Russian oil for very long – if Putin comes to the negotiating table," Ellen Wald, a nonresident senior fellow with the Atlantic Council Global Energy Center, said.

Such a move could raise global oil prices to $80 or higher, but Wald said in a piece on the Atlantic Council's website that the abundance of oil on the market and spare capacity would blunt the economic impact on consumers.

Trump could use company-specific licenses or an extension of the sanctions deadline as a release valve for the new sanctions, ClearView said in an Oct. 23 note. Those options are available regardless of the trade talks, he said.

Rapidan said in an Oct 22 note that the US sanctions on Rosneft and Lukoil are more likely to cause wider Urals and ESPO discounts to Brent instead of material reductions in Russian crude and refined products supply.

However, Rapidan said refined products could be hit harder than crude by the US sanctions. The note said all refined products shipped from Primorsk originate from refineries owned by Surgutneftegas, Rosneft, Lukoil or Gazprom Neft, which are all under sanctions.

"While Surgutneftgas and Gazpromneft have used intermediaries to keep exports flowing, tighter US enforcement will raise risks for buyers, especially in Turkey and Brazil," Rapidan said.

Diesel prices have rallied over the past week, driven in part by supply concerns stemming from the US and EU sanctions. The NYMEX front-month ULSD crack against WTI crude settled at $38.43/b on Oct. 24, up from $33.40/b on Oct. 17.