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U.S. Natural Gas Exports Hit by Tariffs: ETFs in Focus

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China has levied 10% tariffs on U.S. liquefied gas starting Sep 24. This could prove to be a roadblock in the currently thriving natural gas export space (see: all Energy ETFs here).

Per International Energy Agency report, America could surpass Qatar and Australia to become the largest exporter of LNG within the next 5-7 years. The LNG export business is set to boom from 3.5 Billion cubic feet per day (Bcf/d) today (nearly 4% of total U.S. gas production) to 10-12 Bcf/d by 2021, nearly 30% of the current global market. Gas production is increasing continuously and export terminals are scheduled to increase to six by the end of next year.

This imposition of tariff has curbed the business for American LPG producers as the increased prices make it less competitive in a thriving market of China. Per China’s General Administration of Customs, LNG imports have grown by just over 50%, taking the volumes to 58 million tons. This has had a major impact on the global market. Per International Gas Union, global LNG trade increased by 35.2 million tons and China accounted for more one-third of it. Thereby, becoming the second-largest importer behind Japan, surpassing Korea.

China has been seeking to reduce the consumption of coal as it is leading to dangerous levels of production in many of its cities and this forces China to buy cleaner burning gas. The United States only started exporting big amounts of LNG beginning in 2016, and China had become one of the biggest buyers of LNG, behind only Mexico and South Korea. The developers of multi-billion dollar LNG export facilities face pressure especially form southwest Louisiana where about a dozen companies are going to invest nearly $90 billion. These companies are competing for long-term contracts for China.  

“It takes the wind out of the sails a little bit,” said Giles Farrer of Wood Mackenzie, an energy consultancy. The Chinese tariff “restricts the target market a bit for second-wave developers” in the United States, he said (read: Want Large Caps & Guard Against Trade War Too? Play These ETFs).

U.S. energy leader Cheniere Energy Partners,LP (CQP - Free Report) has two long-term sales agreements with state-owned China National Petroleum Corporation (CNPC). It will be shipping LNG from its newly set up liquificaton facility in Corpus Christi by the end of this year.  Investments like these could be in doubt if the trade war keeps escalating.

Leading LNG exporter, Qatar has announced that it will expand domestic production by 30% form 2017-22. It already holds 860 trillion cubic feet of proven natural gas (three-times of U.S.) and supplies more than 20% of China’s requirements. Russia, which provides for 20-25% of global gas exports, is tapping more strongly in this pace by buildings the world’s longest pipelines to supply China.  Australia has the skills and potential to expand their hold on Chinese market. Australia provides for at least half of China’s LPG requirement.

By 2030, nearly 65% of China’s gas demand may need to be fulfilled by imports and U.S. could be a big aid for this as the energy sector in the country is run by most advanced companies of the world (read: FAANG ETFs Face Off Amid New Tariffs: Apple Vs. Amazon).

The tariff imposition will certainly cause some price action in these ETFs:

United States Natural Gas Fund (UNG - Free Report)

It tracks the natural gas futures. AUM is $307.5 million and the expense ratio is 1.3%. The fund has returned 7.6% year to date.

First Trust ISE-Revere Natural Gas Index Fund (FCG - Free Report)

It tracks the ISE-Revere Natural Gas Index. AUM is $134.5 million and expense ratio is 0.60%. It has returned 0.1% year to date. It has Zacks ETF Rank #3 (Hold) and Medium risk outlook.

United States 12 Month Natural Gas Fund (UNL - Free Report)

It tracks the Natural gas futures. AUM is $5.2 million and expense ratio is 0.90%. The fund has returned 3.2% year to date.

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