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To hit trade goals by 2021, US oil and gas industry needs 20% of China's market

"A million barrels per day [of oil] could do the trick" after China and the U.S. announced details of the first phase of a trade agreement after two years of political and commercial conflict, energy analysis firm ClearView Energy Partners LLC said.

One million barrels of U.S. crude oil at $60 per barrel would be just enough to hit the 2020 goal of $18.5 billion worth of additional energy purchases called for in the agreement, ClearView said late Jan. 15.

To get to the second year's goal of $33.9 billion would take 2 million barrels per day of crude and liquefied petroleum gases valued at $70 per barrel, according to Sanford C. Bernstein & Co. oil analyst Neil Beveridge.

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"This is 20% of China's current crude imports," Bernstein told its clients late Jan. 15. "This could be reduced by additional purchases of LNG, but we think that 20 million tonnes per annum (30% of China's current LNG imports) is an absolute stretch. This could reduce the crude import requirement to 1.6 million barrels per day. To reach two million barrels per day of imports from the U.S., China needs to push on all levers."

With the caveats that any deal could fall apart quickly and that China needs to relax its current 5% tariff on crude oil and 25% tariff on LNG imports for Chinese importers, analysts said the immediate winners should be LNG exporters such as Cheniere Energy Inc., tanker firms such as Golar LNG and the Panama Canal, which will be collecting tolls from the increased traffic between the Texas Gulf Coast and Chinese ports.

The losers are going to be Middle Eastern producers and shippers such as Qatar Petroleum, which will see China substituting U.S. oil and gas for their products, analysts said.

The jury is still out on whether the increased demand will boost the fortunes of America's shale oil and gas producers such as EQT Corp., the largest U.S. gas producer, or Occidental Petroleum Corp., one of America's largest shale oil drillers, analysts said after the agreement was signed Jan. 15 in Washington, D.C.

"Likely U.S light sweet [crude oil] replaces Iranian oil that China will stop buying to please the U.S.," oil futures expert Phil Flynn of PRICE Futures Group said Jan. 16. "When the oil export ban was dropped [December 2015], China was our biggest customer."

"We have the capacity to do this," Flynn said. "The tankers are there, the terminals ... we definitely can do it. This is a huge positive turning point with China."

"Come for the commitments, stay for the enforcement," S&P Global Market Intelligence's trade data unit Panjiva said in a research note Jan. 16. Any deal will fall apart quickly if China does not purchase a huge amount of U.S. energy products, and so raising the costs to Chinese companies by tacking on a tariff makes little sense, Panjiva analyst Chris Rodgers said.

That makes Chinese tariffs the first thing to watch to determine if the deal will succeed, ClearView said. "We would be surprised if China planned to assess levies on billions of dollars of U.S. goods it had just committed to purchase," ClearView told its clients. "We continue to regard such exemptions as likely if China is to proceed with good-faith implementation of the deal. That said, we would not ignore the potentially ominous implications of continued silence."

Panjiva is a business line of S&P Global Market Intelligence, a division of S&P Global Inc.