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Energy ETFs: Victims of China Tariffs

Fluor's (FLR) completion of the largest 3D plant design model for Tengiz oil and gas project in Kazakhstan highlights its expertise in providing advanced engineering services.

The trade tensions between the United States and China have hit a fever pitch. After targeting each other’s $34-billion worth of imports, China announced on Aug 8 that it would enact a 25% tariff on U.S. imports worth $16 billion, including crude oil, diesel, cars and coal, in retaliation to the tax on an equal amount of imports enacted by U.S. authorities from August 23.

 Moreover, the Trump administration is now considering a hike in tariffs from 10% to 25% on $200 billion worth of additional Chinese goods. The latest list provided by China for higher taxes includes American liquefied natural gas. The event has the ability to cause a shift in the LNG market, by some analysts, as quoted on CNBC. This is especially true given China was the second biggest importer of LNG globally last year while the United States is climbing the ladder of major LNG exporters.

However, Goldman Sachs analysts believe that though Chinese imports of U.S. oil fell 70% in April through June, it is unlikely to change the fate of U.S. energy exports, per CNBC. Whatever the case, the near-term impact on the oil patch should be negative.

Following China’s announcement, oil priced declined with the WTI crude ETF United States Oil USO losing about 3.2% andUnited States Brent Oil BNO shedding about 2.9% on Aug 8.

Inside Energy Companies’ Pain

It is a two-edged sword for energy companies. First, Donald Trump’s levy of a 25% tariff on steel imports and a 10% tariff on aluminum imports from China and some other countries became a pain for U.S. oil pipeline companies. This should push up raw material prices for pipeline operators.

The article published on Reuters indicated that the U.S. pipeline industry is likely to suffer cost pressure from tariffs as the industry imports about 77% of its steel requirement, according to a 2017 study on the pipeline industry (read: 5 Sector ETFs Most Exposed to Trade Tensions).

On the other hand, U.S. energy companies have about 14% exposure to China. “China is America’s second-largest crude oil customer after Canada. Chinese imports of U.S. crude oil in May, for example, averaged 427,000 bpd, more than any other destination and surpassing Canada’s 289,000 bpd imports, EIA data shows,” as quoted on oilprice.com. Quite expectedly, China’s proposed levies on U.S. oil imports put U.S. energy companies under pressure.

Investors should note that the intensifying U.S.-Sino trade war is keeping hedge funds and other money managers from taking new positions in the WTI and Brent benchmarks, with bets falling to a two-year low.

The escalation of the trade spat sparked off concerns about the likely slowdown of global growth. The International Monetary Fund (IMF) expects global growth to slow down by 2020 as “major economies are flirting with trade war.”

This could derail the economies from their reform agenda. Also, with several developed economies lately showing signs of weakness, investors should be wary of consumption growth in the oil patch (read: Oil ETFs: What You Need to Know).

ETF Impact

ETFs that could come under pressure along with oil ETFs are energy ETFs like SPDR S&P Oil & Gas Exploration & Productinn ETF (XOP) (down 1.6% on Aug 8), VanEck Vectors Unconventional Oil & Gas ETF FRAK (down 1.2%), Invesco DWA Energy Momentum ETF PXI (down 1.6%) and JHancock Multifactor Energy ETF JHME (down 1.2%). On the other hand, inverse energy ETFs like Energy Bear 3X Direxion ERY and Ultrashort Oil & Gas ProShares DUG added about 2.3% and 1.7% on Aug 8.

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US-OIL FUND LP (USO): ETF Research Reports
US BRENT OIL FD (BNO): ETF Research Reports
DIR-EGY BEAR 3X (ERY): ETF Research Reports
PWRSH-DW EGY MO (PXI): ETF Research Reports
VANECK-UNC O&G (FRAK): ETF Research Reports
JH-M-F ENERGY (JHME): ETF Research Reports
PRO-ULS OIL&GAS (DUG): ETF Research Reports
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