Two Trump Moves Brings U.S. LNG, China, and Iran to the Forefront
by DR. KENT MOORS | published MAY 8TH, 2019
The last week has witnessed two Trump geopolitical moves, both introducing major waves of volatility into the energy sector.
The first is the move of a U.S. carrier strike force into the Persian Gulf area to up the ante in the military posture against Iran.
This has prompted my involvement in several protracted conference calls with my global strategic contacts beginning in the early morning hours on Friday and continued for the next several days (including today).
From everything these conversations are conveying, the Iran crisis is about to have a significant impact on oil markets.
How long that impact lasts depends upon moves by both sides over the next few weeks.
A straight-out conflict will certainly pressure crude oil prices up. But those prices will be affected as well by what oil traders dislike more than anything.
The Rest of the World Is Not Happy with the U.S.
As I continue gathering and exchanging insight with colleagues in Europe, Asia, and the Middle East, you will hear more about what is unfolding and how it will play out for energy.
Yet the most disquieting aspect has been the attitude of my contacts in the Persian Gulf itself.
Among both Iranians (who have been expressing to me an unusual candor about defending their country) and those opposed to Teheran there is a widely shared opinion that this is the most unstable situation the region has faced in decades.
And given what region we are talking about that is certainly saying something.
The situation deteriorated further this morning with Teheran announcing that it would withdraw from those provisions of the JCPOA (Joint Comprehensive Plan of Action) dealing with its commitment to postpone work on nuclear weapons.
Now, Trump has already withdrawn the U.S. from JCPOA, but all the others signing the treaty with Iran – the UK, France, Germany, the EU, China, and Russia – had rejected the this pullout.
And after having invested a considerable amount of political capital in defending JCPOA, the Iranian decision puts Europe in a bind.
Some of us may be meeting on short notice (probably in Europe) to develop an investment strategy on the rapidly deteriorating situation. If so, I will bring you along.
However, today’s Oil & Energy Investor addresses the second Trump move…
The U.S.’s Advantage Over China
All signs point to a major increase in tariffs against imports from China, a “trade war” posturing that may be coming about as early as Friday.
Overnight, Beijing has advised Washington via cable that it will respond by rescinding on mollifying approaches it had tentatively introduced in advance of what was looking like a possible accord.
But buried behind the rancor, is one simple fact.
China has fewer tools to use in a trade war than does the U.S.
That means putting roadblocks to American exports of energy products to Asia in general and cutting what had been expected to be a major increase in the import of U.S. liquefied natural gas (LNG) in particular. For the past several months, the combination of the ongoing trade conflict and the likely (now certain) imposition of U.S. sanctions against importing Iranian oil has prompted Beijing to revise its energy import approach.
That means an increase in U.S. tariffs will now almost certainly result in a loss of U.S. LNG export potential to Asia.
U.S. vs. China: The Trade Tiff Hits LNG
As it happens, I addressed this issue on August 29 for my Energy Inner Circle members in one of my weekly Dark Files briefing. The occasion was one of my appearances on Chinese national television.
Here is that briefing.
“The latest developments in the accelerating tariff war between Washington and Beijing are now impacting on the most significant change in how Asia will power its further economic development.
The continental picture centers about the way China meets its energy needs. As a result, China National Television’s international arm (CGTN) reached out for an interview late last week. I explained the current problems attending rising tariffs as they begin to affect both Chinese domestic energy requirements and the prospects for US exports in the mix.
This is a matter I have addressed several times recently and will consider in a major presentation later this year in Singapore.
However, my CGTN discussion on this occasion focused on the current geopolitical environment of U.S. tariffs, Beijing’s response, and the energy bridge increasingly caught in the middle. The network asked that I embellish my points in written form. What follows will appear later today on the CGTN America Website.
The Latest Trade War Casualty
As China closes in on becoming the top LNG importer in the world and the U.S. ramps up its LNG exports, a marriage seemingly made in energy heaven is on the verge of derailing.
Welcome to the latest casualty in an increasingly acrimonious trade war.
Beijing put U.S. LNG imports on its list of products subject to tariff, only to reconsider the move. China has the problem of responding to a major likely increase in American fees with less effective options in response.
I have been a vocal critic of U.S. President Donald Trump’s tariffs. They are simply bad policy. Better ways exist for handling trade disagreements. Even disregarding the contribution to geopolitical tension levels, they will cost more jobs and economic growth in the downstream American market than they are worth.
That’s even before the price tag of subsidizing U.S. farmers and others hurt are figured into the equation.
Trump unveiled the latest $16 billion of Chinese goods subject to 25% tariffs earlier this month, while threatening to up the ante to $200 billion. China responded in kind, initially putting LNG on the list (along with an extension of levies against imports of U.S. oil products). US crude oil was already subject to tariffs, part of the response to the initial Trump tariff move announced in March.
Geopolitical tensions are heating up. The U.S. and China in particular have been at odds with each other, with neither side willing to back down. The world is holding its breath to see what comes out of this rising conflict.
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The problem from the Chinese policy standpoint is now two-fold. First, the U.S. imports about four times as much from China as it exports there. That means Washington has far more leverage in selecting tariff targets. Chinese economic considerations, on the other hand, mean Beijing has more limited options in the tit-for-tat trade spat.
Second, applying tariffs to LNG will almost certainly price U.S. exports out of the Chinese market and deal a blow to the American export prospects. Until coming to a screeching halt in August, China had imported at least 17% more U.S. LNG in the first seven months of 2018 than it had for all of 2017. About 15% of all U.S. LNG had been going to China with the marker prospects for significantly higher volumes in the offing.
But it also occasions a significant problem for China in developing a ready source of gas in its pursuit of an energy policy less dependent on coal.
That’s the basic reason why U.S. LNG appeared on China’s tariff list only to be withdrawn a few days later. As demand for natural gas grows, China has been evenly dividing imports between LNG and piped gas.
But throughput volume on the main Central Asia-China Gas Pipeline (CAGP) – the primary transit route for gas from Turkmenistan, Uzbekistan, and Kazakhstan – is now at more than 93% of capacity.
That means plans had called for an even greater increase in LNG imports. Yet pricing is an increasing problem. The recent Asian heat wave spiked what should have been off-peak prices in Japan and South Korea, the other of the top three LNG global importers.
That wave hit the Chinese market.
The World Eyes China
As the peak price for both contracted and spot market prices annually hits in October, the attempt by Beijing to engineer flexible demand policies will become more difficult if US LNG consignments are priced out of the domestic market.
Having to rely upon the sport market for winter deliveries is very expensive. S&P Platts estimated that last winter China had to pay as much as US$11.70 (80.40 yuan) per million BTUs. Put in perspective, that is some 380% higher than Henry Hub prices (the benchmark for US gas futures contracts) at close of trade yesterday (August 28).
Such a spread certainly explains why U.S. LNG exporters had eyed the Asian market generally, and China in particular, with so much anticipation. Meanwhile, Australia, where additional capacity is available at the four online northwestern projects, Papua New Guinea (offset by American company involvement there), Qatar (the world’s leading LNG exporter), and even Russia are already jockeying to pick up the available volume needed in the Chinese market.
For Beijing, the pricing balance between pipelines and LNG will become more difficult to maintain, while increasing uncertainty on export prospects will dampen U.S. prospects. Both sides are likely to experience some adverse impact on economic growth as this geopolitical game of chicken intensifies.
Unfortunately, neither side shows any indication of crying ‘Uncle.'”
Last time, China was not prepared to pull the trigger on responding with significant cuts in U.S. LNG imports.
This time, they are better prepared and are poised to retaliate against more than American farmers.