There is lots of discussion going on over US-China trade deal from quite some time. The deal was about to be finalized on March 1. However, the decision over the conclusion of the deal was postponed to the March end. Though not much detail is revealed as to what is going on, positive signals are coming out.
There are signs that the US and China have progressed in the deal in recent weeks. This is enough for the happening of something positive in trade among these two countries and effects can already be seen.
During summer and by the end of 2018 when the trade dispute between the US and China was at the mount, China stopped investing in the commodities of the United States. However, the news about US-China deal moving towards positive side brought affirmative changes in the scenario. China recommenced tentative buying of the commodities of the United States.
As per Eric Yep (S&P Global Platts), China began import of crude oil and soybeans from the United States once again. However, in spite of raise in inquiries, the response of Chinese markets towards US LNG (Liquefied Natural Gas) is languid.
After the meeting of US President Donald Trump and Chinese President Xi Jinping in G-20 summit held in early December, there was news that China will help in reducing the US trade deficit with China by agreeing to various products from the United States, though this was not agreed.
The White House, after meeting, stated: “China will agree to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries”.
The meeting between the two presidents was designated as highly productive and successful.
Though the further meeting between the leaders of the two largest economies of the world US and China, has not yet scheduled, the intended finalization of the trade among these two countries have boosted the trade situation of these two nations. The oil market got powered with the trade deal prospects. The positive sign in the deal could be the slow return of purchases of US crude oil by China.
As per the latest data of EIA, when the trade war was elevated during summer 2018, the purchase of US crude by China was totally slashed in August, September, and October. During November 2018, the export of US crude oil to China stood at 8000 barrels/day. The situation improved in December when the average crude oil import by China reached 97,000 bpd. The increase was noteworthy, though it was much lower than the record imports done in June 2018 (510,000 bpd).
As per the interview of Rick Perry (US Secretary of Energy) with CNBC at CERAWeek held this week, the energy exports of the United States are “part of the mix”. It is possible that these are not the catalyst of change but are always part of the game, “the trade talks”. He further added that now America is capable of using it in a positive way during trade negotiations.
There are few gestures from ship-tracking data that the after many months of China’s abstinent from US crude, it is seen that the crude oil of United States is heading to China, although it is not the tariff list of Beijing.
Despite all these, the sustainability in exports of American oil to China will be based on two main factors. These are – the result of discussions over trade-deal in the coming times and the spread in Brent Crude premium over WTI Crude. The more the spread, the more economical it would be for Asian refiners to use U.S. Crude oil as compared to ones linked to Brent.
The crude oil of the United States seems to be more beneficial for the Asian refiners in the recent week, as compared to Middle Eastern supplies. The reason for this is higher oil pricing by Middle Eastern suppliers. The Middle East price their oil production for Asia on the basis of prices of Dubai/Oman that are around $10/barrel more than WTI crude.
In one of the weeks of February, the total export of US crude oil stood at 3.607 million bpd, thereby setting a weekly record. The figures are expected to rise.
According to Ben Luckock, Co-Head of Oil Trading at Trafigura – one of the biggest trading houses of the world, in order to exploit the growth in exports over coming times, U.S. would require China to be one its buyer; putting full stop over trade dispute and finding buyers for its surging crude oil stocks.
Yet things are complicated on the LNG trade side between these two countries. The reason behind this is an imposition of a 10% tariff by China (the fastest growing LNG demand market of the world) on the import of US LNG amid the worsened situation of trade war during summer 2018.
The United started exporting LNG to the world for the first time in February 2016. From that time till December 2018, China was the third biggest purchaser of US LNG preceded by South Korea and Mexico. China bought 62 cargoes that accounts for 10.7% of total LNG export by the United States (suggests US Department of Energy data).
In 2018, the number of LNG vessels that went to China reduced by 20% as compared to 2017 amid the rising concern of trade war. As China imposed a tariff on LNG imports from the US in September 2018, only 6 vessels were exported to China by the US in last six months of 2018; the number was 25 during the same period in 2017 (Reuters report).
To add to the positivity, came a report last week that mentions Sinopec, the biggest refiner of China was getting ready to sign a 20-year deal for LNG supply with Cheniere Energy (LNG company based in Texas) if the US-China trade war gets settled. Also, Sinopec is preparing to purchase LNG from the United States upon receiving direction from the government of China (as the company’s President told to Reuter last week).
However, now with improving conditions of the trade deal, the situation is expected to get better. China could avoid some tariffs imposed on import of LNG from the United States thus paving the way for US trade balance deficit.