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US crude unlikely to figure on China's possible counter tariff radar

Highlights

Chinese refiners don't expect tariffs on US crude

Light sweet US crude not essential for Chinese refiners

US can sell crude to other Asian consumers like S Korea

Sydney — China is unlikely to target US crude oil if it decides to impose retaliatory tariffs in response to Washington's latest announcement to put additional tariffs on Chinese goods, as any impediment to the sale of North American oil to Chinese refiners would not inflict much damage to the US upstream companies.

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US President Donald Trump said Thursday that the US will impose 10% tariffs on another $300 billion worth of Chinese good starting September 1.

China's Ministry of Commerce replied Friday that Beijing will have to take countermeasures to defend its interests. The ministry did not elaborate on how exactly it would retaliate.

If Beijing decides to hit back with counter tariffs, US crude oil is unlikely to be included in the target item list as the product is not an essential trade item for both countries, while the value of US crude sales to China has been rather small this year, sources at state-run Sinopec's trading arm Unipec and independent refineries told S&P Global Platts.

Further, the strong popularity of US crude oil among other Asian refiners suggests that US suppliers could brush aside any Chinese measures aimed at obstructing crude oil marketing in Asia's biggest energy consumer, Asian market and trade sources said.

"The [Chinese] government would have to come up with measures that would cause maximum impact on US exports and trades ... a counter tariff on US crude oil is not [going to do that]," said a Beijing-based trading manager from Chinaoil, the state-run oil giant PetroChina's trading arm.

NON-ESSENTIAL TRADE ITEM

China was the biggest buyer of US crude oil in Asia last year, with imports of 12.28 million mt, or around 90.03 million barrels, according to data from General Administration of Customs.

However, Chinese refiners don't necessarily require a regular dose of light sweet North American grades to run their distillation units, the refinery sources said.

No US crude suppliers have ever managed to tie up a term supply deal with Chinese companies, making a case for Beijing to overlook the item, they added.

Majority of Chinese refineries are designed to process mainly heavy-end crude oil, while any light sweet crude requirements for feedstock blending could be sourced from Far East Russia, Africa and Southeast Asia.

Meanwhile, China's domestic demand for light distillate products has been weak this year, which also dampened buying interest for lighter-end US crude.

China imported 2.12 million mt of crude oil from the US in the first half of 2019, down 76.2% from 8.92 million mt received over the same period a year earlier, GAC data showed.

China has ramped up its purchases from Russia and Angola this year to replace the light sweet US crude.

Russia, the supplier of light and medium sweet crude grades including ESPO Blend, Sakhalin Blend and Sokol, was the second biggest crude import source for China during H1 2019. China received 37.69 million mt, or around 1.53 million b/d, of crude from Russia in H1, up 15.2% year on year.

China's crude imports from Angola also rose 7.5% year on year to 25.31 million mt, or around 1.02 million b/d, in H1.

"All US crude purchases since 2017 have been spot deals and there's nothing committed long-term when it comes to US-China crude trades," said the source at Chinaoil, adding that the US doesn't even make the top 10 crude supplier list for China this year.

US crude cargoes may continue to sell into China going forward but the volume would be limited, a source at state-run Sinopec's Hainan refinery told Platts.

OTHER US CRUDE OUTLETS

US crude oil exports to Asia

US upstream companies would not be too bothered if Beijing imposes a retaliatory tariff on the US crude oil since demand for the product remains strong in other Asian countries, market participants said.

The sharp increase in US crude procurement from refiners in South Korea, Taiwan and Thailand has more than made up for the cut back in China's purchases this year.

"US crude can sell into many other Asian countries and China is not a major outlet ... there's no point in imposing any tariff on US crude oil because it's not going to hurt them," the trading manager from Chinaoil added.

South Korea imported 60.23 million barrels of crude and condensate from the US in H1 2019, up more than fourfold from a year earlier, data from Korea National Oil Corp. showed.

Taiwan broke into the ranking of top three buyers of North American oil in Asia this year. The island state received 192,998 b/d of crude oil from the US in January-May, more than double from same period a year earlier, according to data from the Bureau of Energy, Ministry of Economic Affairs.

Thailand was the top US crude oil buyer in Southeast Asia this year, importing 72,499 b/d over H1 2019, up more than threefold from 18,149 b/d received a year earlier, according to data from the Customs Department.

--Philip Vahn, philip.vahn@spglobal.com

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

--Analysis by Cindy Liang, newsdesk@spglobal.com

--Edited by Kshitiz Goliya, kshitizgoliya@spglobal.com