Increased trade tensions could squelch US crude flow to China

Escalation of trade tensions between the US and China is likely to further dampen US crude flows to China, at time when China was seen stepping back into the US market following a cooling-off period.

Although crude oil imports are not included in the latest round of China's tariff increases to US goods announced on May 13, the heightened tensions between the two countries has been enough to put the brakes on oil trade.

"China will be wary of buying US cargoes because it could be added at any moment and they would be left holding the baby," said Sandy Fielden, director of oil and products research at Morningstar Commodities.

Despite an anticipated decrease in buying from China, Fielden said he does not expect to see total US crude exports to decrease all that much.

Fielden said China went from being the biggest foreign buyer of US crude by mid-2018, to halting all of its purchases of US crude in the latter quarters of the year as US and China began imposing increased tariffs on each other.

China halted buying US crude in August last year, after taking a record 27 million barrels in June and July. Purchases picked up slightly in November and December, when China took about 3 million barrels of US crude.

Some 7 million barrels of US crude were exported directly from the US to China from January to March this year, according to US Census data. That is compared with 32 million barrels of US crude that was exported to China during the same time frame in 2018.

Other market watchers also expect the breakdown in US/China trade negotiations to keep the flow of US crude towards China at a near standstill despite a recent return to the market.

"Before this weekend's events, April was a sign of tepid optimism," according to a report from data intelligence firm Kpler.

Chinese imports of US crude, which do not face Chinese tariffs, finished April at 78,000 b/d, marking the highest level since October of last year, Kpler reported.

China had been seen stepping up its buying activity of US crude in recent weeks as the arb for US crude to Asia has been open. Five May-loading VLCCs had been booked for loading in the USGC with the option for discharge in China, according to S&P Global Platts’ shipping reports. Only one USGC-to-China VLCC was fixed in April.

It is too soon to know if those fixtures will actually load, or if their destinations might be switched from China, to another country.

Despite the loss of China as a major buyer of US crude, oil exports have not seen a major impact as other buyers such as South Korea, India and Taiwan have stepped in as China bowed out.

"That crude just went to other buyers," Fielden said. "Crude is a very fungible commodity. Unlike soybeans, that has limited buyers, oil has plenty of buyers. If China steps out, the market ends up balancing itself out and the oil ends up going somewhere else."