Between last week’s announcement of the U.S.-China trade deal, the recent sell-off in crude oil, and the upcoming OPEC meeting, a lot is going on in the energy markets. The price of crude dropped 11% in the past month, dipping below $46/bbl to hit its lowest point since before the announced production cuts last November. It has since risen back above $48, right around where it was before the November announcement. The May 25th OPEC meeting will be crucial, as the oil cartel will decide whether to extend the production cuts past their June 30th expiration date. The major oil producers desperately need prices to stabilize in the $50-$60 per barrel range, especially Russia and Saudi Arabia, whose economies have taken heavy losses recently. If the members cannot agree on continued cuts, prices could fall to $40 a barrel or even lower, devastating the countries that heavily depend on oil.
However, the U.S. is not cooperating with the tightening of oil supply. American shale oil companies are still profitable with prices around $50 a barrel, and the U.S. crude oil exports reached a record high in 2016. Although it is still a relatively small player on the global level, U.S. oil is growing fast and its competitive prices have a downward effect on the market.
Aside from shale, the U.S. is very well-positioned in the LNG (Liquefied Natural Gas) market. With 184.3 billion cubic feet exported in 2016, the U.S. is the fastest growing LNG producer in the world, and President Trump’s administration is committed to making this growth a high priority through investment and relaxed regulation. Worldwide demand is growing, and the U.S. is quickly increasing its capacity to be able to accommodate its own needs and rapidly increase exports. According to the EIA (Energy Information Administration), the U.S. will be able to export 40% of its production by 2020, whereas a couple years ago they did not export LNG at all.
Last Friday, President Trump announced a deal with Chinese President Xi Jinping, outlining a 100-day action plan to facilitate increased trade between the two largest economies in the world. The deal will allow U.S. beef exporters and credit card providers access to the Chinese market, and Chinese poultry producers access to the American market. However, potentially the biggest development of the deal is the announcement of a planned LNG trading partnership between the countries. Although no significant policy changes were made, this part of the pact has drawn heavy speculation and media coverage. Most of China’s long-term LNG contracts are set to expire in the near future, and the U.S. is positioning itself to fill a large portion of the demand.
The potential partnership would be greatly beneficial for both countries. The U.S. would gain a massive source of potential buyers for its exploding market, as well as possible investors to help finance its needed expansion of LNG infrastructure. Meanwhile, China would benefit from the competitive U.S. prices and reduce its energy dependence on Russia, which has been known to leverage its position to squeeze its dependents in political negotiations. Also, LNG is much more eco-friendly than other types of energy, and provides a great alternative to coal, which China relies on heavily but wants to move away from.
Curiously, U.S. natural gas futures declined 5% over the weekend following the deal announcement. However, this drop can likely be attributed to other factors, and not long-term fundamentals. Now may be the perfect time to buy, with production and exports on the rise and the expected renewal of OPEC cuts. Saudi Arabia and Russia simply can’t afford to see oil prices decline further, and will likely push the agreement through. 6 months ago, both the lead-up and aftermath to the OPEC meeting saw U.S. natural gas futures skyrocket. Following the deal with China and the current low price, this effect could be magnified with next week’s meeting.
USD/CNY has also dipped since the deal, despite years of steady upward movement and all signs pointing to a strengthening dollar. That could present another buying opportunity ahead of the OPEC meeting, as November’s meeting was followed by the dollar’s highest level against the yuan since before the 2008 recession.
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