Masters of War - Lingering Threat of Major Trade War Still Spooks U.S. Oil and Gas Exports

The trade war between the U.S. and China continues to intensify — and now the rhetoric is shifting from steel and soybeans to oil and gas. What started as just an exchange of escalating bluster has developed into real tariffs that will be enacted beginning August 23 — which will include petroleum-based products like LPG and refined products. The commodities that would have the biggest impacts on global trade flows, liquefied natural gas and crude oil, were under tariff threat as well. LNG is still on a list of potential commodities to receive tariffs in the future, while crude has since been removed. But, keep in mind that today’s state of affairs could change tomorrow, so tariffs on those two commodities should be considered very much on the table. Today, we examine the potential trade war fallout for growing exports of U.S. LNG and crude oil.

We know that talk is cheap, and right now for oil and natural gas, the trade war is still all talk. But that hasn’t quite erased the fear of future tariffs among Chinese LNG and crude buyers, who will continue to walk with caution in case the trade war escalates further.  That’s not the case for other petroleum-based products, like propane, butanes, gasoline and diesel — we know now that direct U.S.-to-China exports of these products will face tariffs and will have to be shuffled around in months to come to avoid them. Fortunately, the impacts of tariffs on those markets aren’t nearly as potent as would be the case for oil and LNG.

As we outlined in I’m Movin’ Out, the chatter around exports is more important to the U.S. energy sector  in 2018 than ever before, so we have to think about the potential consequences, even if tariffs on crude and LNG don’t come to pass. Since the onset of the Shale Revolution, exports have been key to keeping the prolific production levels of crude, natural gas liquids (NGLs) and natural gas in balance. Could that balance be under threat if a full-out trade war erupts? We think not, but China’s influence has been advancing in nascent U.S. energy export markets like LNG and crude.

A week ago Wednesday (August 1), President Trump announced that he was asking U.S. officials to consider increasing upcoming tariffs on $200 billion in Chinese goods from 10% to 25%. And in response, on Friday, China’s government announced proposed tariffs on an additional $60 billion of U.S. goods, including a 25% tariff on U.S. LNG. On Tuesday, the U.S. made tariffs official for $16 billion worth of imported Chinese goods. China answered back with another $16 billion in additional tariffs on several petroleum products that excluded crude and LNG. The U.S. had levied $34 billion in (non-energy-related) tariffs last month, a move intended to prompt negotiations between the two countries, but instead China responded with commensurate tariffs of its own.