The pathway for renewed deliveries of LNG from the U.S. to China remains unclear weeks after a "phase one" trade deal between the two superpowers eased tensions in what was viewed as a positive first step toward a resolution.
Market observers who watched President Donald Trump's State of the Union speech Feb. 4 found little indication of how future trade negotiations with China will take shape.
Trump did not make specific reference to China's compliance with an aggressive commitment to purchases of U.S. commodities, including energy products such as LNG, and he did not highlight imminent plans for "phase two" negotiations, analysts at research and consulting firm ClearView Energy Partners LLC pointed out in a Feb. 5 note to clients.
"Without a clear path to phase two, phase one seems more likely to extend U.S.-China trade war rather than end it," ClearView analysts said.
The U.S. Census Bureau reported Feb. 5 that the U.S. deficit with China fell $73.9 billion to $345.6 billion in 2019 — a data point that some analysts predicted the president would use to vindicate the trade conflict.
No U.S. LNG cargoes have been delivered to China since March 2019, and China's 25% retaliatory tariff on U.S. LNG stayed in place through the trade deal.
The phase one deal signed Jan. 15 included a pledge by China to make $52.4 billion worth of additional energy purchases across the next two years compared to what it bought in 2017. The products include U.S. crude oil, LNG, refined products and coal. A breakdown of specific product purchases was not released.
But China would face serious logistical challenges and market constraints in meeting the purchasing targets, researchers at Rice University found in a Feb. 4 report. Asian LNG prices are in the doldrums after plummeting on oversupply concerns, and there is a limited amount of U.S. LNG available to help China meet its goals for energy imports from the U.S. Most of China's LNG imports are also under long-term contracts.
"It is highly unlikely that other suppliers of LNG will readily relinquish market share for the sake of a U.S.-China trade deal; rather, the terms of trade across all markets must be sufficient for such an outcome to occur," wrote researchers led by Ken Medlock, senior director of the center for energy studies at Rice University's Baker Institute for Public Policy. "Unless China removes or reduces the 25% tariff on U.S. LNG that was effective June 2019, it remains a challenge for Chinese gas buyers who already bear losses to import a large amount of U.S. LNG."
A coronavirus outbreak in China has also threatened to curb the country's oil and gas demand.
China will likely try to diversify its gas supply and increase LNG imports from sources other than the U.S., such as Australia, Qatar, Mozambique and Russia, Rice researchers said. One beneficiary of the chill on LNG trade between the U.S. and China could be Russia, the report said. Russia has increasingly focused its gas strategy on Asia.
"Overall, other than a potential reduction in global LNG demand due to an economic slowdown, the trade war is likely to lead to a reshuffling of the LNG supply portfolio, or who supplies whom, but it is unlikely to change aggregates," the Rice researchers said.