U.S. LNG Producers Fear More Price Drops as They Await China Buys Under Phase 1 Deal

SEATTLE (Oil Monster): China has restarted talks with U.S. liquefied natural gas marketers to buy more LNG, several industry executives told Reuters, but they are worried that any purchases may come too late to keep natural gas prices from falling further due to a glut of global supply.

China pledged this month to buy an additional $18.5 billion in U.S. energy products this year, but the U.S.-China trade agreement left tariffs in place, including a 25% levy on LNG imports that puts U.S. LNG at a disadvantage, producers said.

“The U.S. doesn’t have a margin that would allow any country to charge 25%” above global prices, said Michael Smith, chief executive of Freeport LNG, referring to the tariff. Until that tax is removed, “it’s a non-starter,” he said.

Exports of liquefied natural gas are the fastest growing source of U.S. gas consumption, more than doubling since 2017 largely on Asian demand. Prices have tumbled due to rising global supply, and the glut is expected to grow. This situation will pressure LNG producers to cut output, and adding to hurdles for developers looking to finance multibillion-dollar projects.

The Phase 1 accord between the United States and China has a two-year term, making it harder for buyers and sellers to enter long-term agreements, executives said. Phase 1 should be viewed as a “ceasefire” as opposed to an accord, said Jason Feer, head of business intelligence at LNG shipbroker and consultancy Poten & Partners.

LNG buyers in China will avoid long-term U.S. deals as long as there is a chance that the Phase 1 accord lapses without a real end to the trade dispute, he said. They risk having to sell off U.S. purchases or absorb the hefty tariff if the current deal expires without a replacement.

Near-full LNG stocks recently sent fuel prices to a near decade low: $3.43 per million British Thermal Units (BTUs) in Asia and $4 per million BTUs in Europe. U.S. capacity has increased about 22 million tonnes per annum (MTPA) since the start of 2019, and another 17.2 MTPA is projected in 2020.

Chinese state oil firm Sinopec was near an agreement with top U.S. exporter Cheniere Energy Inc when the trade dispute erupted. If Sinopec agrees to terms on a long-term purchase, it could signal new agreements are possible, Smith said. Cheniere and Sinopec are revisiting supply terms in the wake of the Phase 1 deal.

Courtesy: www.reuters.com