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China-US trade war heats up

Energy isn't at the core of current trade tensions, but US exports could emerge as a bargaining tool as the spat moves toward negotiations

US President Donald Trump has insisted on Twitter that the US is not engaged in a trade war with China, but the severity of this week's opening salvos suggests that economic tensions between the countries are more likely to expand than contract in the coming weeks and months. 

Washington struck first by placing 25% tariffs on $50bn's worth of Chinese imports, as Trump at last followed through on a consistent theme of his protectionist campaign rhetoric. But Beijing quickly shot back with tariffs of its own on a range of US goods including soybeans, beef, chemicals and cars, aiming to inflict not just economic damage on the US but also political injury to Trump. Markets tumbled in response on fears the trade spat was intensifying too quickly for either side to back away from.

Energy isn't at the heart of the fight, but there are implications for oil and gas markets. Most immediately, a range of specialised steel tubes and pipes used in oil and gas drilling and pipelines, as well as parts for offshore oil and gas platforms, are included in the list of items subject to the US's 25% tariffs.  

Anyone who has been to an oil and gas trade show in recent years knows that China has become a vital part of the global supply chain for the industry, so these tariffs could have a direct effect on the economics of new pipelines and drilling projects. This comes at a time when such projects are booming due to rapidly rising US production. New Permian drilling and pipelines in both the northeast and the west Texas shale play are most at risk.

Aside from the direct effect on the industry's kit, there are broader fears that a dip in the global economy would slow demand growth.

Oil prices have remained in a relatively tight range in 2018, in spite of surging American production, thanks to confidence that strong economic growth across the world will keep demand humming along. The US and China are expected to be major drivers of that growth. 

Negotiated exit

The tariffs announced so far probably won't have a major effect on the global economy, but there is an inherent risk of escalation that could hit commodity markets. That said, while both sides have engaged in tit-for-tat measures, both are also likely looking for a negotiated exit.

In any deal to ease the trade tensions, Trump will want Beijing to commit to lowering its trade surplus with the US, which has been a particular obsession for the US president.

There are broader fears that a dip in the global economy would slow demand growth.

One of the easiest ways China could do this would be to buy more oil, liquefied natural gas and natural gas liquids from the US, which is looking for new markets for surging exports.

In 2017, China was the third-largest buyer of US LNG behind Mexico and South Korea, bringing in around 15% of total exports. A slew of new LNG export capacity will come online over the next two years, and although much of that is already committed to other buyers, there will be scope for China to buy more American gas on the spot market. This would be especially attractive to China’s importers if the current wide spread remains between Asia’s oil-linked benchmark prices and the Henry Hub, which sets US LNG export prices.

China was also the second-largest buyer of American crude exports in 2017, snapping up around 202,000 barrels a day of the US's 1.1m b/d total shipments abroad. Most new American light oil production will have to be exported, and China’s independent refiners, which prize easily refined light crude grades, could prove a promising market.  

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