Phase One Trade Deal Inked: Limited Impact on Energy Sector

SCI99

2020-01-16

U.S.-China Phase One Trade Deal Inked: Limited Impact on Energy Sector

In the agreement, China committed to boosting purchases of U.S. goods and services by $200 billion over the next two years, including $77.7 billion for manufactured goods, $37.9 billion for services, $52.4 billion for energy and $32 billion for agricultural products.

As for the energy sector, the trade deal aims to boost the U.S. energy export to the world top energy consumer, but as a matter of fact, based on the scale of energy trading between the two countries in 2017, it is extremely hard to fully achieve a $18.5 billion trade scale for the first years and of course even harder for the second year around $33.9 billion as planned.

However, China preferred crude oil from the Persian Gulf, and the trading volume from the U.S. didn’t make a breakthrough even though it didn’t affect by the trade war in the past two years. For gasoline and diesel, China is more like an export country rather than an importer, especially in the future foreseeable refining overcapacity. For the coal, China’s coal-rich reservoir pattern limited the room in this direction. The global LNG market also faltered at lows, and the low price and sufficient supply made the U.S. LNG less attractive than before globally. As for others, the methanol trading volume may see some increase from the U.S. but not too much, and scattered refined products cannot stand for the $500 billion level trade as well. The only two left products are LPG (propane and butane) and fuel ethanol. However, the fuel ethanol is categorized as an agricultural product, and China’s E10 promotion is under some setbacks, in particular, to remove the nationwide promotion in 2020 from the list (which doesn’t mean to stop all promotion). Therefore, the fuel ethanol import may trigger some contradiction with the domestic policy, and the future trends of this product will still need propulsion from national willpower.

The only one left is LPG, and its future is predicted to be much better than others. Currently, the propane CFR China price is much higher than the international level, because Chinese buyers cannot access the U.S. low-priced availabilities under the 25% tariff. The price spread between the propane from UAE and the U.S. usually reaches $100/mt, and the future trade deal may fill up this potential space rapidly, and China’s buying intension and buying potential are both strong enough to bear this import peak by all means.

However, taking everything into consideration, the $52.4 billion energy purchase in two years is still far beyond the current buying capacity of China, and the national policies are expected to adjust in a dramatic way consequentially.

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