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China Enforces Tariffs On U.S. LNG: Will Oil Market Bloom?

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On Aug 8, China’s Ministry of Commerce announced that starting Aug 23, import tariffs of $16 billion will be levied on a variety of American products, including liquefied natural gas (LNG), oil products and coal. The tit-for-tat levies came into action when, on Aug 8, the United States slapped a similar rate of tariffs on China starting Aug 23.

As the second-biggest importer of LNG, China’s proposal to impose tariffs on LNG imports from the United States is definitely bad news for the LNG industry and President Trump's “energy dominance agenda.” However, higher LNG import tariffs are unlikely to affect local players significantly.

New Set of China Tariffs Fan Trade War Fears

On Aug 8, the Office of the United States Trade Representative (USTR) issued a statement which included a list of Chinese products worth $16 billion, which will be subject to an import tariff of 25%. China, clearly in no mood to sit back, retaliated with a similar move. On the same day, China’s Commerce Ministry said that will impose a 25% tariff on 333 different U.S. goods worth $16 billion. Like the United States, China’s tariffs will come into effect from Aug 23.

In this list of U.S. goods, one of the targeted items was LNG products. China’s imposition of tariffs on U.S. LNG is a concern for the industry. This is mainly because China has already become the second-biggest LNG importer in 2017 with around 15% of U.S. LNG. The International Energy Agency (IEA) expects the Asian country to reach the top rank by 2019.

On the other hand, the United States has already become the biggest producer of natural gas and is one of the largest exporters of LNG. Moreover, the IEA projected that the Trump-led country is projected to be the second biggest exporter by 2022, in place of Qatar. Per IEA “expansion of U.S. exports” will also boost “LNG trade.”

Who Will Win And Who Will Bleed?

China’s imposition of a 25% tariff on LNG imports will result in U.S. LNG being priced out of the attractive Chinese gas market. Additionally, geopolitical tensions will weigh on American exporters' attempt to become one of the biggest suppliers to the China market. According to a study by Fitch Solutions, major players in the LNG industry, including Royal Dutch Shell plc (RDS.A - Free Report) and TOTAL S.A. (TOT - Free Report) , are projected to suffer the most.

This is mainly because, these companies acquire shipments from U.S.-focused projects and then sell to different markets per the demand and price. Additionally, higher tariffs will push LNG prices upward in the near term, which eventually will weigh on U.S. LNG customers.

Despite higher LNG prices, U.S. gas exports will continue to bloom as most of them are protected through contacts over the long run. So the U.S. LNG boom will continue irrespective of China’s high tariffs.

Given this scenario, domestic companies like ConocoPhillips (COP - Free Report) , Occidental Petroleum Corporation (OXY - Free Report) and Hess Corporation (HES - Free Report) are expected to gain. ConocoPhillips and Occidental Petroleum carry a Zacks Rank #2 (Buy), while Hess has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

In Zacks Oil And Gas - Integrated - United States, nine out of 10 companies reported earnings. Of these, six delivered an earnings beat.

Summing Up

Undoubtedly, LNG companies have something to worry about in the near term as higher Chinese import tariffs will weigh on the companies’ performance. However, U.S. LNG will continue to thrive as the country is already the biggest producer of LNG in the world.

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