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US oil, LNG exports may be caught in tariff fight

EIA shows China imported 5% of oil, 3% of LNG from US in February

China could slow, cease buying US oil, LNG amid trade fight

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The United States Trade Representative took steps to formalize President Donald Trump's threat to boost tariffs on $200 billion worth of Chinese goods to 25% from 10% and the Chinese Ministry of Commerce warned of retaliatory steps if the US follows through, potentially affecting flows of US crude oil and LNG to one of its most significant markets.

In a statement Wednesday, China's Ministry of Commerce said escalating trade frictions are not in the interest of either country or the world and said the Chinese side regrets it will have to take countermeasures if the US goes ahead with the increase.

The USTR sent a notice to the Federal Register that is scheduled to be published Thursday. The tariff increase on the US side is expected to go into effect early Friday morning.

It remains unclear if oil and LNG exports will be caught up in the looming tariff battle, according to Frank Verrastro, senior vice president and trustee fellow with the Center for Strategic & International Studies' national security program.

"A lot depends on how these trade talks actually evolve -- are we still in a tactical negotiating stage to increase leverage and a 'better' deal or is something deeper on the horizon," Verrastro said. "There's a logical symmetry to US oil/gas exports and China's need and appetite for oil and gas."

Kevin Book, managing director with ClearView Energy Partners, said while China has not specifically threatened US crude exports with tariffs, Chinese state-owned companies did stop buying US crude in July, when the trade fight between the two countries intensified.

"A similar cessation could lie in the offing in the wake of the proposed tariff escalations," Book said.

China imported US crude every month from October 2016 through July 2018, peaking at 510,000 b/d in June 2018, according the US Energy Information Administration. But China did not import US crude in August, September, October or January. It only imported 8,000 b/d in November and 97,000 b/d in December, according to EIA.

China took in 145,000 b/d of US crude in February, about 5% of the total 2.99 million b/d of US crude exported that month, according to EIA's most recent data.

China may be looking to replace some Iranian condensate volumes, now prohibited by US sanctions since a waiver expired last week, with imports of light US crude, Verrastro said.

If the Chinese side raises tariffs to 25% as expected, and that applies to US LNG, that would likely pressure flows from the US to be increasingly diverted to other countries and output from other exporting nations to be used to meet demand from China. That invariably could affect spot prices in the short term and commercial development by US projects in the long term.

"The overall picture is that the US is technically the largest 'spot' exporter of LNG in the world and that China is rapidly set to become the largest spot importer, particularly in the winter months," said Madeline Jowdy, S&P Global Platts Analytics' senior director of global gas and LNG.

The US exported about 3.46 Bcf of LNG to China in February, roughly 3% of LNG the US exported that month. The US exported LNG to China every month, with the exception of September 2018, since September 2017, according to the EIA.

But LNG exports to China have declined significantly since the winter of 2017-18, when exports spiked because of a colder-than-normal winter and contract shortfalls, Jowdy said.

Jowdy added that the US has been exporting an average of one to two cargoes of LNG to China.

"The reduced levels are more likely a function of very weak Asian spot demand for LNG in general due to warmer-than -ormal winter as opposed to any associated increase in the price of US spot cargoes," Jowdy said. "Basically the margins to ship spot volumes to Europe over Asia have been more favorable since last September, [al]though they are improving now."

The action comes as a Chinese delegation is headed to Washington for further negotiations late this week.

Trump turned up pressure on the talks Sunday by threatening to increase the tariffs, as well as pursue further tariffs on remaining Chinese goods that have not yet been subject to the taxes.

The USTR notice also says the agency will establish a process in which companies can seek exclusions.

-- Maya Weber, maya.weber@spglobal.com

-- Brian Scheid, brian.scheid@spglobal.com

-- Harry Weber, Harry.Weber@spglobal.com

-- Edited by Valarie Jackson, newsdesk@spglobal.com

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