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US crude exports could be a victim of brewing trade war with China


Widening price discounts have boosted US oil exports to China

China may restrain US oil imports in retaliation to new tariffs

Any action expected to be rebalanced by market

Washington — The Trump administration is pushing to greatly expand exports of crude oil and other domestic energy products to China, but tariff threats and disputes could ultimately hinder energy trade flows across the Pacific.

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"From the US side, I don't see any benefit to letting this trade tension spoil the bilateral energy trade," said Jane Nakano, a senior fellow with the energy and national security program at the Center for Strategic and International Studies, in an interview with the Platts Capitol Crude podcast.

"But for the Chinese side, if they do want to send a signal that they're not quite happy with the way that trade discussions are going they might try to restrain the volumes that they would have otherwise imported from the US."

In October 2017, one out of every 21 barrels of crude oil produced in the US was sent to China, according to the US Energy Information Administration.

The volume of US crude sent to China was another in a series of records set in the roughly two years since long-standing restrictions on US crude exports were dropped. While the amount of US crude shipped to China has declined in recent months (averaging 380,000 b/d in March, or one out of every 27 barrels, according to EIA), China is expected to be a top destination for US crude for decades to come.

China, the world's largest net importer, has matched well with US crude exports due to current pricing.

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S&P Global Platts calculations show WTI held a 4-cent discount to Forties on a delivered basis into China over March, and at an 81-cent premium to ADNOC's Murban. Those spread have only worked further into WTI's favor in the months since, with WTI averaging a $1.82 discount to Forties and a a 74-cent discount to Murban. China's growing need for crude and refined products, matched the recent growth in US supply, could be an "easy win" for both sides in trade talks, but could also become a source of retaliation, Nakano said.

"Just as newfound US resource wealth can serve as a tool for rebalancing trade, it can also become a target for retaliation in trade disputes," analysts with ClearView Energy Partners said in a note.

US officials, led by Commerce Secretary Wilbur Ross, met with Chinese government counterparts in Beijing this weekend as part of ongoing trade talks.

"The meetings focused on reducing the United States' trade deficit by facilitating the supply of agricultural and energy products to meet China's growing consumption needs, which will help support growth and employment in the United States," the White House said Monday in a statement.

In an earlier statement, the Chinese government warned about the impact of President Trump's plans to impose 25% tariffs on $50 billion worth of Chinese goods later this month.

"All economic and trade outcomes of the talks will not take effect if the US side imposes any trade sanctions, including raising tariffs," China said.

Still, retaliation from China may mean little, however, for US oil exports, according to Samantha Gross, a fellow at the Brookings Institute's energy security and climate initiative.

"What would likely happen is that the market would rebalance around it," Gross said. "Crude is not perfectly fungible, for sure, but it's certainly a liquid product traded on a liquid market. So if the Chinese choose not to buy it, then they're not going to have any trouble finding other buyers for it."

US crude oil exports to Italy and the UK soared to a records in March, encouraged by sustained WTI discounts to local sweets like Azeri Light and Forties, as well as Nigerian Bonny Light, into the Mediterranean Lavera as well as into Rotterdam, according to the EIA.

Exports are on the rise to India as well, as refiners in the country seek alternatives to ever more expensive Saudi crudes and politically risky volumes from Iran.

The US is focused on a "fair" trading relationship with China, the White House said Monday, one which has increasingly focused on reducing the trade deficit through US energy exports. Steven Winberg, the US Energy Department's assistant secretary for fossil energy, was part of the US delegation to take part in the talks, a DOE spokesman said Monday.

US Treasury Secretary Steve Mnuchin has said the US could increase energy exports to China to $50 billion, up from $8.6 billion in 2017 which was a relatively large jump from 2016 when $2.6 billion worth of energy exports were sent to China, according to the US Census Bureau. Crude oil exports accounted for more than half of energy exports sent to China in 2017.

Nakano called Mnuchin's $50 billion energy export goal a "very ambitious," but said it may be possible if nuclear energy technology was classified within the sector.

"If you define energy much more broadly, you might get close to that target," she said.

--Brian Scheid,

--James Bambino,

--Edited by Valarie Jackson,