China’s insatiable demand for oil and gas has for long been transforming the global markets. Soaring US energy exports to the world’s biggest oil buyer have added a new twist to the game.
Surging US oil shipments to China have created trade between the world’s two biggest powers that until 2016 just did not exist. Data in Thomson Reuters Eikon shows US crude shipments to China went from nothing before 2016 to a record 400,000 barrels per day in January, worth almost $1bn.
The paradigm shift evolves as US now produces more oil than top exporter Saudi Arabia and is set to take over the No 1 producer spot from Russia by the end of the year.
The US Energy Information Administration has raised its 2018 crude output forecast to 10.59mn bpd, up by 300,000bpd from their previous forecast.
US energy sales to China are still modest compared with the $9.7bn of oil shipped by the Organisation of the Petroleum Exporting Countries (Opec) to China in January. But they are already cutting into a market long dominated by the likes of Saudi Arabia and Russia, also with the threat of more competition to come.
Cheniere Energy, the only exporter of US liquefied natural gas from shale fields, has signed the first long-term deal to supply LNG to China. The agreement commits Cheniere to supply 1.2mn metric tonnes a year to China National Petroleum Corp through 2043.
China imported 38.1mn tonnes of LNG in 2017, more than the 37.6mn South Korea imported. Japan, the world’s largest importer, had shipped in 72.3mn tonnes of LNG through the end of November, according to official data.
In 2017 alone, demand for LNG in China jumped 46% and the Cheniere contract is seen as further positioning America as a global gas supplier vying for market share with LNG giants, Qatar and Australia.
China’s planned opening of a domestic market to trade futures contracts on March 26 has huge implications for the dollar’s well-established role as the global currency of the oil market.
Could the yuan challenge the dollar’s dominance in oil? Not any time soon, since paying for oil in dollars is an entrenched practice, according to some analysts, and China doesn’t have “nearly the influence in the oil market needed to carry out such a coup.”
But futures trading would help China wrest some control over pricing from the main international benchmarks, which are based on dollars. Denominating oil contracts in the yuan would also promote the use of China’s currency in global trade, one of the country’s key long-term goals.
In a deeper sense, it’s tricky to get a clear picture of what’s happening in any fast-changing country like China. A lack of trust in the country’s opaque economic data and a dearth of communication about policy decisions are not helping, too.
But every player in the energy market – from producers to consumers and investors – has plenty of compelling reasons to strain to understand how energy demand evolves in the $10tn-plus economy amid China’s quest to play a bigger role in the global economy.
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