US Risks Losing Long Game in China LNG Spat

REDIRECTING SUPPLY

In the short term, Chinese traders of could respond to Beijing’s actions by directing contracting U.S. LNG supply to Europe, where LNG is set to command a higher price than in China in the coming months as European buyers replenish depleted inventories following a relatively cold winter.

They will benefit from the fact that unlike many other producers, U.S. LNG exporters place little or no restrictions on cargo destinations, meaning buyers can ship them where they like. This allows nimble traders to respond to changes in global supply and demand and divert cargoes to buyers offering higher prices for the fuel.

Benchmark European TTF gas prices in recent weeks moved into a significant premium to Asian LNG prices, with the spread between two contracts currently near its highest since October 2023, reflecting the tightening of European supplies while Asian demand relatively sagged.

Deliveries of the super-chilled fuel have been key to helping Europe offset the abrupt drop in Russian pipeline gas supplies following Moscow’s invasion of Ukraine in 2022.

Consequently, the United States has become Europe’s largest LNG supplier, accounting for 45% of imports into the region last year, according to Kpler data. Europe is already the largest buyer of U.S. gas exports.

But pushing ever more LNG into Europe is a short-term fix. Europe’s gas demand is expected to decline over the long term, given its intent to reduce carbon emissions by shifting to renewables. In fact, consumption is forecast to decrease from 507 billion cubic metres (bcm) in 2023 to between 281 and 407 bcm by 2035, according to the International Energy Agency’s scenarios. And that’s after it fell some 20% following the 2022 energy crisis spurred by Russia’s invasion of Ukraine.

Chinese domestic gas demand, on the other hand, is forecast to rise from 398 billion cubic metres (bcm) in 2023 to between 397 and 522 bcm by 2035, according to the IEA.

So the European market may be a band-aid to help U.S. gas producers staunch any tariff-induced bleeding, but the trade disruption will still likely be a net negative for U.S. exporters over the long run.

And even though Europe may appear to be the primary beneficiary of this burgeoning trade war, its growing dependency on U.S. gas could mean the bloc is simply replacing decades of overreliance on Russian gas with an outsized dependence on a superpower that has grown increasingly protectionist under both Republican and Democratic administrations.

President Trump once famously quipped that “trade wars are good and easy to win”, but identifying any long-term winners here is likely to prove challenging.