From Skirmish to War: U.S. Oil and Gas in the Crosshairs

Matthew Carr By Matthew Carr
Emerging Trends Strategist

Market Trends

The headlines say it all…

Markets Edgy on U.S.-China Trade War Fears

China: We Would Fight a Trade War ‘To the End’

Can Trump Win a Trade War With China?

First, the administration announced tariffs on steel and aluminum imports, which were seen as a broad-brush attack against the Chinese. The White House followed with more tariffs targeting as much as $60 billion worth of Chinese goods.

We didn’t have to wait long for Chinese retaliation.

China’s Ministry of Commerce responded with tariffs on $3 billion worth of American products, including fruit, pork, wine, seamless steel pipes and more than 100 other goods.

And these tariffs were imposed on products from states and regions in the U.S. that were heavily in favor of President Trump during the 2016 election.

It’s not a “trade war” per se yet. It may be better defined as a “conflict” or “skirmish”… at least for now.

A lot of focus is going to be on intellectual property, pork and especially U.S. soybeans. A tariff on any of these would be a significant development.

But there’s another U.S. industry caught in the crossfire, one that’s in the midst of recovery from its battle with the Middle East…

The U.S. oil and gas industry.

It’s been a vocal opponent of this burgeoning trade skirmish with China.

For starters, the entire U.S. oil supply chain is built on steel.

Drilling rigs, platforms, pipelines and even processing facilities depend on steel. And it’s estimated that three-quarters of the steel imported into the U.S. is for oil and gas pipelines.

But the looming concern now is whether this trade conflict with China will derail two of America’s nascent export industries: oil and liquefied natural gas (LNG).

From Zero to Hero

For four decades, the U.S. banned exports of crude oil.

This was in reaction to the OPEC oil crisis of the 1970s and U.S. oil output declining.

But the export ban was lifted in 2015. And the U.S. is now poised to become the top oil-producing country in the world.

Much of that is due to companies like Pioneer Natural Resources (NYSE: PXD) in the Permian Basin.

As we know, a string of disruptions upset the global oil supply chain last year.

From a fire at Europe’s largest refinery to hurricane after hurricane slamming the U.S. Gulf Coast to a devastating earthquake that struck Mexico…

These events helped send the price of crude soaring in the second half of the year.

American companies capitalized…

And U.S crude poured into undersupplied overseas markets…

In October 2017, U.S. crude exports hit a record 1.7 million bpd.

Now, it’s important to remember that before the ban on crude exports was lifted in 2015, U.S. oil traveled only to Canada and Mexico… and that was for refining purposes.

But in September and October of last year, Asia accounted for 40% of U.S. crude exports. These exports had doubled from what they were in the previous eight months.

And China was the biggest consumer of U.S. crude.

 

China Can’t Get Enough U.S. LNG

There are about a dozen proposed LNG facilities along the U.S. Gulf Coast.

Very few have been given the green light.

And most require long-term contracts signed at fixed prices to even move forward. A trade war with China could be devastating for the U.S. LNG industry.

China is undergoing an aggressive switch from coal to natural gas. And the country has been gobbling up LNG cargoes at a rapid pace.

Last year, the country’s natural gas consumption increased 15%. And its imports of LNG soared by 50%.

This ravenous appetite is what has helped LNG prices to tighten, sending Asian LNG prices to a three-year high.

In 2017, China passed South Korea as the world’s second-largest consumer of LNG behind Japan.

And in February, the largest U.S. LNG exporter, CheniereEnergy (NYSE: LNG), signed a 25-year supply contract with China National Petroleum Corp.

And China National Petroleum is currently building eight gas storage facilities to help meet growing demand.

Right now, China is the third-largest consumer of U.S. LNG behind Mexico and South Korea. But it could become the biggest market.

The trade skirmish between the U.S. and China could evolve into a trade war. If so, there could be losers on both sides.

Good investing,

Matthew