The absence of US crude oil from China's latest round of retaliatory tariffs has done little to revive buying interest from Chinese refiners who continue to cut back on US crude, wary of the unpredictability of the ongoing trade dispute.
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Oil traders said they see the removal of US crude from the tariff list as temporary and not indicative of normalizing relations, or of crude oil being taken off the table in the US-China trade war.
This means that any new commitments to purchase US crude are fraught with risk, and new deals are unlikely to happen unless there are enough safeguards, such as options to resell or alternative destinations, oil traders said.
Unipec, the trading arm of Sinopec, the world's largest refiner by capacity, had purchased nearly 16 million barrels of US crudes for June loading, but July loading barrels have slumped, according to vessel tracking data from cFlow.
China received 14.92 million barrels of US crude in June, which was a historical high, but volumes fell to 9.2 million barrels in July, and August arrivals in China are unlikely to rebound, cFlow data showed on Monday.
"We have received our August WTI delivery and will not take any US cargoes in coming months, while Unipec has not offered us any US crude either," an executive from a central Sinopec refinery in central China said.
Officials from two other Sinopec refiners in eastern and southern China, who were regular end-users of US crude, also confirmed the absence of new US crude purchases. Unipec declined to comment.
"No matter how cheap US crudes are, they won't be 25% lower than those from other origins," a Chinese independent refiner said, adding that it was hard to predict whether US crude would attract additional tariffs.
It takes at least 56 days for a dirty tanker to travel from the US Gulf Coast, where most US crude is exported, to China. The trade war could take any direction over that period, making any US crude purchases a gamble, another Singapore-based trader said.
PREMIUMS AND DISCOUNTS
Market fundamentals were reflective of Chinese aversion to US crude purchases.
Crude markets typically respond to urgent procurement needs or distressed cargoes, in unforeseen events such as outages.
Trading houses attempting to resell any US cargoes headed for a Chinese refinery were getting discounted offers from the market, and traders with non-US cargoes were asking for premiums, market sources said.
Substituting US cargoes on the prompt market has been painful for Unipec, and it was "bleeding quite a bit" when it tried to divert some June-loading US barrels, after Beijing's tariff threat was first announced on June 16, a Singapore-based trader said.
The Chinese government's deferral of tariffs has opened up a window for Unipec to complete the delivery of its US cargoes on the water, without incurring massive losses.
Additionally, Unipec, which is the world's biggest buyer of US crude, has included options for alternative destinations in case tariffs are imposed unexpectedly.
It chartered the VLCC DHT Lotus to carry 1.97 million barrels of crude loaded from US Gulf Coast on July 20, with both China and Singapore as destination options, shipping fixtures showed.
Removing crude from the list also helps Unipec maintain bargaining power as it won't look so desperate when shopping for replacements amid falling supplies from Venezuela and sanctions on Iran.
China is the world's biggest oil buyer with average imports of 9.02 million b/d over January-July.
China received an average of about 329,000 b/d of US crude over January-July, cFlow data showed. This accounted for about 3.6% of China's total crude imports.
The bulk of Chinese imports of US crude have been the light sweet WTI Midland, Eagle Ford, Bakken and Domestic Sweet Blend grades.
The most sought after US grade is Mars and very little of that has been made available to Chinese refiners, according to officials at Sinopec-affiliated refiners, who also said that US light crudes are not always compatible with Asian refineries configured to process medium-sour crudes from the Middle East.
The Alaskan North Slope grade is a viable option as it loads at the Alaska Marine Terminal 600 miles north of Valdez, Alaska, and takes only 15 days to cross the Pacific Ocean to Asia.
Alaskan North Slope is more suitable for Chinese refineries, has been exported to Asia for several decades and was recently imported by ChemChina in early July.
Beijing removed crude from its latest list of 25% tariffs on $16 billion worth of US imports effective August 23. US crude was included in an earlier proposal announced on June 16.
--Oceana Zhou, firstname.lastname@example.org
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--Edited by Jonathan Dart, firstname.lastname@example.org