China tariffs on LNG, oil aim at U.S. energy dominance agenda

CNBC

Scott DiSavino and Chen Aizhu

NEW YORK/BEIJING, Aug 3 (Reuters) – China’s proposed tariffs on U.S. liquefied natural gas and crude oil exports opens a new front in the trade war between the two countries, at a time when the White House is trumpeting growing U.S. energy export prowess.

China included LNG for the first time in its list of proposed tariffs on Friday, the same day that its biggest U.S. crude oil buyer, Sinopec, suspended U.S. crude oil imports due to the dispute, according to three sources familiar with the situation.

On Friday, China announced retaliatory tariffs on $60 billion worth of U.S. goods, and warned of further measures, signaling it will not back down in a protracted trade war with Washington.

That could cast a shadow over U.S. President Donald Trump’s energy dominance ambitions. The administration has repeatedly said it is eager to expand fossil fuel supplies to global allies, while Washington is rolling back domestic regulations to encourage more oil and gas production.

The juxtaposition here is clear: it is hard to become an energy superpower when one of the biggest energy consumers in the world is raising barriers to consume that energy. It makes it very difficult,” said Michael Cohen, head of energy markets research at Barclays.

The United States is the world’s largest exporter of fuels such as gasoline and diesel, and is poised to become one of the largest exporters of LNG by 2019. U.S. LNG exports were worth $3.3 billion in 2017. China is the world’s biggest crude oil importer.

China had curtailed its imports of U.S. LNG over the last two months, even before its formal inclusion in the list of potential tariffs. It had also become the largest buyer of U.S. crude oil outside of Canada, but Kpler, which tracks worldwide oil shipments, shows crude cargoes to China have also dropped off in recent months.

It comes at a time when the United States has several large-scale LNG export facilities under construction, and after Trump’s late 2017 trip to China that included executives from U.S. LNG companies.

China became the world’s second-biggest LNG importer in 2017, as it buys more gas in order to wean the country off dirty coal to reduce pollution.

“This will not affect the trade but will simply make gas more expensive to Chinese consumers,” said Charif Souki, chairman of Tellurian Inc, one of several companies seeking to build a new LNG export terminal.

China, which purchased almost 14 percent of all U.S. LNG shipped between February 2016 and May 2018, has taken delivery from just one vessel that left the United States in June and none so far in July, compared with 17 in the first five months of the year.

“The U.S. gas industry will be much harder hit by this as China imports only a small volume whereas U.S. suppliers see China as a major future market,” said Lin Boqiang, professor on energy studies at Xiamen University in China.

(For an interactive graphic on U.S. LNG shipments to China, see https://tmsnrt.rs/2n9bQKn)

Meanwhile, according to Kpler, crude exports to China dropped to an estimated 226,000 barrels per day (bpd) in July, after reaching a record 445,000 bpd in March. Sinopec, through its Unipec trading arm, is the largest buyer of U.S. crude.

China would likely hike purchases from Saudi Arabia, Russia, the United Arab Emirates and Iraq if the tariffs slowed U.S. flows, said Neil Atkinson, head of the oil industry and markets division at the International Energy Agency.

There will be “others who will be offering barrels to China, so it could find itself able to replace lost volumes from the U.S.,” Atkinson said.

With LNG demand expected to skyrocket over the next 12 to 18 months, there are still some two dozen firms seeking to build new LNG export terminals in the United States and tariffs may limit their ability to secure sufficient buyers to finance their proposed projects.

“Cheniere continues to see China as an important growth market and LNG as a win-win between the United States and China,” said Eben Burnham-Snyder, a spokesman at Cheniere Energy Inc, which owns one of the two LNG export terminals currently operating in the United States. He added they do not see tariffs as productive.

One project being developed is in Alaska, which would carry natural gas through an 800-mile (1,287 km) pipeline across the state to a terminal that would convert it to LNG to take it to China.

The $43 billion project is still in development, and the Alaska Gasline Development Corp said on Friday that it believes the “current trade tensions between the United States and China will be resolved well in advance of Alaska LNG exports to China.”

(Reporting by Scott DiSavino and Aizhu Chen Additional reporting by Jessica Resnick-Ault and Andres Guerra Luz in New York, Collin Eaton in Houston, Yereth Rosen in Anchorage, and Josephine Mason in Beijing Writing by David Gaffen Editing by Chris Reese and Susan Thomas)

Oil prices dip as Trump calls on OPEC to ‘reduce pricing now’

CNBC

  • Oil prices eased after U.S. President Donald Trump urged OPEC to reduce prices.
  • OPEC together with a group of non-OPEC producers started to withhold output in 2017 to prop up prices.
  • Recent price rises have also been spurred by a U.S. announcement that it plans to re-introduce sanctions against Iran from November.

An oil pumpjack operates near Williston, North Dakota.

Andrew Cullen | Reuters
An oil pumpjack operates near Williston, North Dakota.

Oil prices eased on Thursday after U.S. President Donald Trump sent a tweet urging OPEC to reduce prices for crude.

Brent crude futures were at $77.88 per barrel at 0053 GMT, down 36 cents, or 0.5 percent, from their last close.

U.S. West Texas Intermediate (WTI) crude futures were down 35 cents, or 0.5 percent, at $73.79 per barrel.

Trump late on Wednesday said the Organization of Petroleum Exporting Countries (OPEC) producer cartel was driving up fuel prices.

“The OPEC Monopoly must remember that gas prices are up & they are doing little to help. If anything, they are driving prices higher as the United States defends many of their members for very little $’s. This must be a two way street. REDUCE PRICING NOW!” Trump wrote on Twitter.

Oil market disruptions and limited supply can't keep oil prices at bay

Oil market disruptions and limited supply can’t keep oil prices at bay  

OPEC together with a group of non-OPEC producers led by Russia started to withhold output in 2017 to prop up prices.

Recent price rises have also been spurred by a U.S. announcement that it plans to re-introduce sanctions against Iran from November, which will also target its oil industry.

“A key driver of the rise in prices has been the OPEC-Russia deal to cut oil output, compounded by collapsing Venezuelan production and the U.S. decision to end the Iran deal,” National Australia Bank (NAB) said in its July outlook.

Ship brokerage Banchero Costa said Iran’s crude oil production was currently around 3.8 million barrels per day (bpd), but added “there is the risk of production decreasing going forward as exports are again affected by renewed sanctions implemented by the U.S.”

OPEC and Russia announced in June they were willing to raise output to address concerns of emerging supply shortages due to unplanned disruptions from Venezuela to Libya, and likely also to replace a potential fall in Iranian supplies due to U.S. sanctions.

NAB said its oil price forecasts “point to Brent spending the next few months largely in the mid-to-high $70s (per barrel) range, although meaningful OPEC-Russia output increases could push prices lower later in the year and higher U.S. shale production should impose an upside limit on WTI.”

Meanwhile, U.S. crude oil production has soared by 30 percent in the last two years, to 10.9 million bpd.

That means just three countries, Russia, the United States and Saudi Arabia, meet a third of global oil demand.

OPEC is about to make a major oil market decision. Here’s how next week’s meeting could end

CNBC

  • OPEC, Russia and other producers are widely expected to begin easing their deal to limit output at a meeting in Vienna next week.
  • The gathering is shaping up to be a contentious event, with lines drawn between countries that can benefit from an output boost and those with little to gain.
  • Despite the discord, analysts think OPEC will reach a deal to moderately raise output over several months, with an option to hike further.
Khalid Bin Abdulaziz Al-Falih, Saudi Arabia's energy minister and president of OPEC, speaks as Alexander Novak, Russia's energy minister, left, listens during a news conference following the 172nd Organization of Petroleum Exporting Countries (OPEC) meeting in Vienna, Austria, on Thursday, May 25, 2017.

Akos Stiller | Bloomberg | Getty Images
Khalid Bin Abdulaziz Al-Falih, Saudi Arabia’s energy minister and president of OPEC, speaks as Alexander Novak, Russia’s energy minister, left, listens during a news conference following the 172nd Organization of Petroleum Exporting Countries (OPEC) meeting in Vienna, Austria, on Thursday, May 25, 2017.

A meeting of the world’s biggest oil producers is shaping up to be a contentious event, but analysts think the fractious group will reach consensus on their historic agreement to manage the crude market.

OPEC and other exporters including Russia appear poised to ease voluntary production limits, which have helped shrink a global oil glut since they went into effect in January 2017. The deal isn’t set to expire until the end of the year, but rising prices fueled largely by geopolitical risks have forced the producers to consider their exit strategy.

The agreement calls on OPEC and other producers to keep 1.8 million barrels a day off the market, but they’ve actually been cutting deeper than that.

OPEC meetings are closely watched because the producer group pumps about 40 percent of the world’s oil, so its policy decisions can have major implications across the energy mix. President Donald Trump, perhaps wary of the average U.S. gasoline price hovering near $3 a gallon, has recently blamed OPEC for oil prices, which recently hit 3½-year highs.

Next week’s meeting is also thornier than past gatherings because OPEC’s current production cuts are not limited to the 14-nation cartel. Russia and several other producers have also been throttling back output, and top OPEC producer Saudi Arabia needs to keep the young alliance together, or its ability to manage the market would be diminished.

Hadley Gamble previews the upcoming OPEC meeting

Hadley Gamble previews the upcoming OPEC meeting  

The Saudis will have to consider their partnership with Russia, their relationship with the United States, and simmering tensions with Iran, OPEC’s third-biggest producer and Riyadh’s chief regional rival.

“The decisions that are going to be made in Vienna are going to be more geopolitical this time than normal,” said Dan Yergin, vice chairman of IHS Markit and a Pulitzer Prize-winning chronicler of the petroleum industry.

OPEC tensions rise

Heading into the meeting, a rift has opened among producers with competing interests, raising fears of a repeat of OPEC’s June 2011 meeting, when members left Vienna without agreeing on a shared output policy.

Saudi Arabia and Russia, in particular, have spare capacity and could capture market share by pumping more. Both have expressed support for hiking output.

However, many producers are tapped out and would prefer to hold back supply, which supports prices. Those nations include Venezuela, where output has cratered amid a prolonged economic crisis, and Iran, which is facing renewed U.S. sanctions aimed at cutting off its oil exports.

But they also include Iraq, OPEC’s second-biggest producer. On Monday, the country’s oil minister, Jabbar al-Luaibi, said hiking output could “damage the international markets” and warned unilateral efforts by some members to change the policy might violate the deal.

Luaibi appeared to be responding to reports that Washington asked Saudi Arabia to fill the gap left by a drop in Iranian exports before Trump abandoned the Iran nuclear deal and slapped wide-ranging sanctions on the country.

Yergin said he believes the Saudis would back a policy that keeps international benchmark Brent crude oil prices in the $75-$85 per barrel range, which would support their objectives, including maintaining close ties with the Trump administration.

“They really wanted to see the U.S. withdraw from the Iranian deal, and that means less Iranian oil … so you have to put more oil into the market,” he told CNBC on Wednesday.

Deal remains likely

The public bickering could continue as members aim to negotiate the best possible deal for their country. But despite the discord, analysts think the group will nevertheless reach a deal to begin easing the production caps — and any increase will likely be relatively limited and gradual.

Ed Morse, Citigroup’s head of global commodities research, told CNBC that the Saudis, along with Kuwait and the United Arab Emirates, will likely push for a 500,000 barrel per day hike, leaving another half a million barrel increase until a future review of the market, perhaps in September.

That aligns with the view at RBC Capital Markets, where the firm’s global head of commodity strategy, Helima Croft, also sees OPEC erring on the side of caution with a 500,000 bpd bump. She thinks the cartel will signal a strong willingness to take further action, but she remains wary of tensions ahead of the meeting.

The OPEC boost 'is going to come' as the market is very tight: Expert

OPEC may boost production as the oil market is very tight: Expert  

“Nonetheless, we could envision a scenario where the meeting proves to be so antagonistic because of deep divisions over production and sanctions that they fail to reach a consensus, leaving big producers like Saudi Arabia and Russia to act on their own,” RBC said in a research note.

Michael Cohen, head of energy markets research at Barclays, said that would push oil prices into the $80-$85 range, but he thinks the scenario is unlikely. He forecasts OPEC will increase output by 700,000 to 800,000 bpd through the end of the year. If that happens, Barclays would stick to its view that Brent will average $70 a barrel this year and $65 next year.

Francisco Blanch, Bank of America Merrill Lynch’s head of global commodities research, sees Russia, Saudi Arabia, UAE and Kuwait gradually increasing output by about 200,000 bpd each quarter, eventually adding 1.2 million bpd by the end of next year. In his view, the producers will make the adjustments based on oil market data to prevent a price spike.

“If the cartel aggressively lifts output over the next six months, balances will quickly shift into a surplus, pushing prices lower,” Merrill Lynch said in a research note. “Yet the uncertainty around Iran and Venezuela also creates a difficult path ahead, as it opens the door to multiple OPEC+ responses.”

Oil edges up on cautious optimism over Trump, Kim summit in Singapore

Oil edges up on cautious

optimism over Trump, Kim

summit in Singapore

  • Oil prices edged up along with global markets on Tuesday.
  • Trump and Kim started a one-day summit with the goal to narrow differences over how to end a nuclear standoff on the Korean peninsula.
  • Traders also said they were reluctant to take on large new positions ahead of a meeting between OPEC and some of its allies.

Oil

Lucy Nicholson | Reuters

Oil prices edged up along with global markets on Tuesday on cautious optimism over the outcome of a summit between U.S. President Donald Trump and North Korean leader Kim Jong Un in Singapore.

But movements in crude markets were limited as traders said they were reluctant to take on large new positions ahead of a meeting between producer cartel OPEC and some of its allies on June 22.

Brent crude futures were trading at $76.56 per barrel at 0201, up 10 cents from their last close.

U.S. West Texas Intermediate (WTI) crude futures were at $66.24 a barrel, up 14 cents from their last settlement.

Crude has been supported by healthy demand and voluntary production cuts led by the Organization of the Petroleum Exporting Countries (OPEC), but analysts said oil markets were also currently heavily driven by public policy events and statements.

Trump and Kim on Tuesday started a one-day summit in Singaporewith the goal to narrow differences over how to end a nuclear standoff on the Korean peninsula.

“This week is all about global developments … And today marks the potentially momentous meeting between Donald Trump and North Korean leader Kim Jong-Un in Singapore,” said Shannon Rivkin, investment director at Australia’s Rivkin Securities.

Global markets edged up as the highly anticipated U.S.-Korea summit got underway in Singapore amid expressions of goodwill.

“Any positive outcome could be good news for markets,” Rivkin added.

In oil market fundamentals, however, not all things point to higher prices, with output from the three biggest producers, Russia, the United States and Saudi Arabia on the rise.

Russian production has reportedly climbed from below 11 million barrels per day (bpd) to 11.1 million bpd in early June.

In the United States, output has risen by almost a third in the last two years, to a U.S. record of 10.8 million bpd.

“The deluge of U.S. crude production continues to hold the top-side in check,” said Stephen Innes, head of trading at futures brokerage OANDA.

Now, top exporter Saudi Arabia – which has so far led OPEC’s efforts to withhold supplies – is also showing signs of upping production.

Saudi Arabia has told OPEC that it raised oil output to a little more than 10 million bpd in May, up from 9.9 million bpd in April.

“This fits with the theory that the Saudis and Russians are subtly moving toward a change to the agreement at this month’s meeting,” McKenna said.

OPEC, together with some non-OPEC producers including Russia, started withholding output in 2017 to end a global supply overhang and prop up prices.

OPEC and its partners are due to meet on June 22 at the cartel’s headquarters in Vienna, Austria, to discuss policy.

“Expect more of the same whippy markets driven by rumors and innuendo ahead of June 22 Vienna OPEC meeting,” Innes said.

Trump’s sanctions on Iran may be creating an oil trading boom — in China

CNBC

  • Trade in Chinese yuan-denominated crude oil futures has jumped since President Donald Trump pulled the U.S. out of the Iran nuclear deal.
  • There is speculation that restrictions on Iranian oil sales and the lack of access to dollar financing will spur demand for the Shanghai-listed derivatives.

A clerk counts stacks of Chinese yuan at a bank in Beijing, China.

Getty Images
A clerk counts stacks of Chinese yuan at a bank in Beijing, China.

Trade in Chinese yuan-denominated crude oil futures has surged since President Donald Trump pulled the U.S. out of the Iran nuclear deal.

Launched on March 26, crude oil futures on the Shanghai International Energy Exchange (INE) were met with fanfare — and skepticism about how much a state-managed marketplace could displace the well-established crude trade in the New York Mercantile Exchange’s West Texas Intermediate and the Intercontinental Exchange’s Brent futures.

“Beijing ‘s attempts to ‘internationalize’ the contract appear to have paid off.”-BMI Research

But Trump’s move to reimpose sanctions on Iran may have spurred interest in the Chinese oil futures. Last Wednesday, daily trade volumes in INE oil futures hit a record of over 240,000 lots, double what they were on Tuesday when news of the renewed sanctions broke.

“There has been speculation that restrictions on Iranian oil sales and the lack of access to dollar financing will boost demand for yuan-denominated Shanghai futures,” said BMI Research in a note on Monday. “With China deepening its energy ties with Iran and given Beijing’s desire both to support the contact and — relatedly — to further internationalize the use of its currency, payment in yuan and benchmarking against Shanghai futures would seem logical.”

Veteran oil trader John Driscoll told CNBC last week that Iranian traders have the option of trading in Chinese yuan-denominated crude oil futures on the Shanghai International Energy Exchange — circumventing any restrictions on dollar-denominated trade and U.S. banks.

Doubts about how long it will last

Even so, some industry watchers remain skeptical over the long-term impact Iran will have on the Chinese futures, as Iranian crude is not deliverable into the Shanghai oil contract.

Even so, interest in the Shanghai oil futures have surpassed expectations, with Chinese state-owned companies and foreign interests taking part in the trade.

At least one oil sales agreement has been signed with state-owned major Sinopec, Reuters reported.

“Concerns over heavy state dominance in the oil sector does not appear to be dampening participation in the contract, neither does its denomination in yuan and the added FX risks this brings,” said BMI, adding that the futures are gaining tracing.

“Beijing ‘s attempts to ‘internationalize’ the contract appear to have paid off,” it added.