US energy exports to climb as China pledges ramp-up in purchases

US oil and gas exports should jump over the next two years if China fulfills its pledges to increase energy purchases under the trade deal between the world's two largest economies signed on Wednesday, executives and traders said.

The accord did not specify quantities of the products but it commits China, the world's biggest oil importer and second-largest liquefied natural gas (LNG) importer, to buy $52.4 billion more of US energy supplies over the next two years.

US energy executives and analysts welcomed the deal after LNG and crude exports to China largely dried up last year.

However, many uncertainties about implementing the purchases remain and market reaction was mixed with oil trading lower after the deal signing but rising during the Asian morning.

China's commitments under the deal amount to an increase of $18.5 billion in 2020 and $33.9 billion in 2021 from a baseline of $9.1 billion in 2017.

The agreement "is a step in the right direction that will hopefully restore the burgeoning US LNG trade with China," said Jack Fusco, chief executive of Cheniere Energy Inc (LNG.A), the largest exporter of US LNG. Fusco attended the ceremonial signing at the White House.

Despite China's withdrawal from most US LNG purchases last year, US sales to other Asian countries, Europe and Latin America still drove the United States to become the world's third-biggest LNG supplier in 2019, behind Qatar and Australia.

"New long-term LNG deals need to be signed, on top of incremental short term and spot trading, to achieve those ambitious numbers," said Li Yao, founder and chief executive of SIA Energy, a China-focused energy consulting firm.

"Oil as well, as they are the biggest in value and quickest to execute."

Goldman Sachs analyst forecast in a January 10 report that the agreement would mean China may increase its crude imports to 500,000 barrels per day (bpd) in 2020 and 800,000 bpd in 2021. It also said LNG imports could hit 10 million tonnes this year and 15 million in 2021, valued at $38.2 billion combined.

Traders including Vitol SA and Trafigura AG provisionally chartered four to eight supertankers to load US crude for China this month and next, data from Refinitiv, Kpler and Vortexa showed. The companies declined to comment.

One Singapore oil trader said economics favor US crude as freight rates are dropping and rising shale production has US crudes selling at a discount to international Brent. But, a second trader warned that the price window "is really tricky as it can open and shut within days."

A shale boom propelled the United States to the world's largest producer of crude and natural gas, with China's purchases of US crude and LNG surging, before the trade dispute flared.

Analysts, US energy trade executives and Asian buyers said demand, pricing and transportation costs would determine whether exports over two years hit the $52.4 billion mark.

"We are in uncharted territory here; quota sales are not the norm," said Sandy Fielden, an energy analyst at financial services firm Morningstar.

Tariffs will remain on many products the two countries sell to one another, including LNG. China imposed a 25% tariff on LNG, crimping most activity with the United States.

"We have to have some sort of clarity around how China is going to either exclude the tariffs that are currently in place against LNG or ultimately lift them before we start to see a real sort of sizeable amount of US LNG finding its way to China," said Charlie Riedl, executive director of trade group Center for LNG.

A senior Trump administration official confirmed on Wednesday that China will need to issue waivers or adjustments to tariffs to meet its buying commitments.

Other concerns center around the technical requirement of Chinese refineries.

"The purchases would require China to buy the bulk of US exports and China's refineries are also not currently set up for light US oil," said analysts at research firm Capital Economics.

China's share of total US crude exports dropped from over 20% in the first half of 2018 before the trade war to nearly 6% in the first half of 2019.

The United States exported about $5.4 billion worth of crude to China in 2018, but the value of those shipments slid to just $2.6 billion in 2019 through October, according to data from the US Census Bureau and the Energy Information Administration.

"This is a good first step in removing barriers with one of our most critical trading partners," said Derrick Morgan, a senior vice president at trade group American Fuel and Petrochemical Manufacturers (AFPM).