Phase one of the trade deal could be a turning point for natural gas prices. China might purchase more US energy and agricultural products to narrow the trade deficit.
On December 13, President Trump tweeted, “They have agreed to many structural changes and massive purchases of Agricultural Product, Energy, and Manufactured Goods, plus much more.” In the last decade, natural gas prices fell 62.1%. Meanwhile, the United States Natural Gas Fund LP (UNG) fell 99.7%. UNG invests in natural gas active futures.
Why is natural gas critical to China?
In 2018, coal contributed 59% of China’s total electricity generation—down from 60.4% in 2017. China is moving towards a cleaner energy source to power its economy. Likewise, there was a similar pattern in the US. Before 2016, coal was the largest source of energy for electricity generation.
However, with exponential growth in US shale oil production, natural gas supplies rose. We already discussed the sharp decline in natural gas prices. Lower natural gas prices encouraged US power producers to shift from coal to natural gas-fired power plants. Also, natural gas is a cleaner source of energy than coal.
In 2018, natural gas-fired power plants contributed around 35% of the total electricity generated in the US. The EIA expects a rise in natural gas demand for electricity generation in 2020. However, the coal contribution in total electricity generation could fall.
By 2020, China plans to bring down its dependence on coal to less than 58%, as reported by the Institute for Energy Economics & Financial Analysis. Higher natural gas usage could help China reduce its reliance on coal.
US pipeline infrastructure
In 2019, the EIA expects the natural gas pipeline capacity to rise between 16 Bcf (Billion cubic feet) per day and 17 Bcf per day in 2019. Kinder Morgan (KMI) and ONEOK’s pipeline projects are important to strengthen natural gas supplies from the Permian Basin.
Kinder Morgan’s Gulf Coast Express Pipeline will connect Waha Hub to Agua Dulce Hub. This year, natural gas producers in Texas paid pipeline operators to remove the natural gas glut. Natural gas prices turned negative.
China energy market
Among US energy exports, natural gas could be important for China. Russia and Saudi Arabia are already competing for crude oil market share in China. Also, Russia’s dominance has risen in China’s natural gas market with the new gas pipeline project.
However, Fortune reported that the new gas pipeline project is exposed to environment perils like earthquakes, forest fires, and others. Analysts doubt whether the Russia-China natural gas pipeline project will be profitable. To learn more about Russia’s other gas pipelines, read Russia’s Gas Pipeline Network in Europe.