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Unipec faces uncertainty as Beijing threatens 25% tariff on US crude imports

Singapore — China's Unipec faces uncertainty over its recent massive purchase of US crudeafter Beijing announced on Saturday that it was considering imposing a 25%import tariff on US crude oil in response to President Donald Trump?s similardecision on Chinese product imports.

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Unipec, the trading arm of state-owned oil giant Sinopec, recently bought 16million barrels, or eight VLCCs, of US crude for June loading and the cargoesare due to arrive in China over July-August after a 56-day voyage. This wasUnipec's largest purchase of US crude ever and was only roughly 2 millionbarrels less than its monthly crude imports from Saudi Arabia, traditionallyits biggest supplier.

All crude oil imports into China are currently exempt from tariffs.

"This will have a big impact on Unipec's business and feedstock supplies forSinopec refineries. They need to wait until the policy is clear as theeffective date for the [implementation of the] tariff on US crude is yet to beannounced," a Beijing-based source with knowledge of the matter told S&PGlobal Platts on Saturday.

"Sinopec is likely to lobby Beijing," the source said, adding that Unipec's UScrude shopping was more or less in support of Beijing's previous effort tonarrow its trade deficit with the US.

As the June-loading US crude cargoes are expected to arrive in China inJuly/August, they might need to find another home if Beijing were to imposethe 25% tariff before they arrive.

It also means the trading company will have to find other supplies to feedSinopec's refineries.

Sinopec recently cut back its nominations for Saudi crude by 40% of the totalmonthly allocations for May-July loading in response to thehigher-than-expected official selling prices set by Saudi Aramco.

Company sources said then that Sinopec would get enough supplies from otherproducers, such as Iran, Iraq, Russia and the US.

Sinopec had said last year that it would raise its crude shipments from the USby around 80% to 200,000 b/d in 2018 from 112,000 b/d last year.

More Sinopec refineries have started to process US crude, most of which aremedium sour grades such as Mars and Southern Green Canyon, although lightcrudes such as WTI, Bryan Mound Sour, and even shale oil from Eagle Ford havejoined the flow.

TRADE WAR

The trade war between the US and China escalated on Saturday with the latterthreatening an additional 25% tariff on $50 billion of US goods, includingenergy, in response to President Trump's decision to place similar tariffs onthe same annual value of Chinese product imports.

Among the $50 billion worth US goods, the additional tariff on a total $34billion worth of US agricultural products, cars and marine products are due tocome into effect on July 6, according to an announcement by the Customs TariffCommission of the State Council.

Additional duties on the remaining $16 billion of US goods, including crudeoil, LPG, gasoline, naphtha, fuel oil and natural gas, will be announced at alater date.

The latest tariff threats between the two biggest economies comes less than amonth after Beijing and Washington on May 19 inked an agreement to put thebrakes on their trade dispute after China agreed to buy more US goods, keyamong them being LNG and crude oil.

Soon after the agreement, Unipec was reported to have bought around 16 millionbarrels of US crude oil for loading in June, marking the biggest volume everto be lifted in a month by the company.

"Beijing is waiting for a final decision [on the tariffs] from the UnitedStates congressional hearing and will respond in line with that," aBeijing-based policy observer said.

US CRUDE SUPPLY TO CHINA

The US exported 380,000 b/d of crude to China in March, accounting for roughly23% of total US exports of 1.67 million b/d, according to data from the EnergyInformation Administration.

The global crude oil market is fungible and even potentially steep tariffs byChina on US oil exports may have only a relatively minor impact, said AmyMyers Jaffe, a senior fellow for energy and the environment at the Council onForeign Relations.

"The oil market is a swimming pool so having the Chinese take a bucket fromthe shallow end instead of the deep end doesn't matter much. Another buyerwill take US crude," Myers Jaffe said Saturday. "In a really oversuppliedmarket US crude could suffer a slight penalty, but in a tight market it wouldbe relatively negligible."

Still, US oil exporters would need to discount their crude to find buyers,which could have significant market response, said Jason Bordoff, foundingdirector of Columbia University?s Center on Global Energy Policy and a formerenergy adviser to President Barack Obama.

"US crude can find other buyers, of course, but the reduced demand from Chinawould nonetheless exert some downward pressure on US crude prices and widenthe WTI-Brent spread," Bordoff said Saturday.

"More broadly, the rising threat of a trade war is a risk to global economicgrowth rates, which could lower global crude demand growth by several hundredthousand barrels a day and thus depress prices," Bordoff said

--Oceana Zhou, oceana.zhou@spglobal.com

--Dexter Wang, dexter.wang@spglobal.com

--Brian Scheid, brian.scheid@spglobal.com

--Edited by E Shailaja Nair, shailaja.nair@spglobal.com