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Chinese oil traders shun US crude as trade row deepens

London — Chinese crude oil traders said this week they are shying away from US crude as trade dispute uncertainties mean that government backing for purchase commitments could evaporate overnight, leaving them exposed to undelivered seaborne cargoes.

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The situation became particularly dire in the past month and a half when the US-China trade relationship was a geopolitical roller coaster of tariffs and countermeasures.

In late June, the reopening of negotiations between the US and China was accompanied by Beijing's promise to buy more US-origin commodities, mainly agricultural products, but also energy products like crude oil and LNG.

But by early August, the White House imposed 10% tariffs on Chinese goods and a massive devaluation in the Yuantook the trade row into new territory, raising fears of a currency battle. This was followed by a surprise easing of tariffs Tuesday after a phone call between negotiators in Beijing and Washington.

All of this happened while the Greece-flagged VLCC Sophia was still on its 50-day voyage from the offshore Galveston lightering area in the US to China's Shuidong and Yangpu ports, highlighting how much the trading and geopolitical landscape can change in the space of a single voyage.

Chinese buyers were unsure if Beijing would still back purchase commitments amid this fracas.

A Shanghai-based trader with a US crude supplier said its customers in China are decidedly averse to US spot cargoes, let alone the signing of long-term supply contracts. "They won't buy unless the US ceases tariffs and withdraws the statement saying that China was a currency manipulator," the trader added.

Traders with China's state-owned oil giants said this week that they will not touch US barrels amid policy uncertainties. A trader for commodity trading house Mercuria echoed the same sentiment, despite the fact that US crudes remain attractive due to good economics and high yield of light ends.

TANKER MOVEMENTS

China currently does not impose any tariffs on US crude imports, but data shows that US-China crude flows have collapsed regardless, and demand from China has eroded significantly.

State-run Unipec, the trading arm of China's largest refiner Sinopec, has long-term contracts to purchase about3-4 VLCCs of US crude each month, but actual deliveries in China have been much fewer as most cargoes were sold midway on the global market.

The national oil company would rather divert the cargoes than bring them back to China due to the unpredictability of tariffs.

The US exported 4.25 million barrels of crude to China in the week ended July 5, 2.7 million barrels in the week ended July 19, and around 550,000 barrels each in the weeks ended August 2 and August 9, respectively, according to cFlow, Platts trade flow software.

But a ship's destination data can be misleading and there is a strong likelihood of the cargoes being diverted elsewhere.

US crude arrivals in China hit an eight-month high of 799,318 mt (189,000 b/d) in May, and slipped marginally to 769,095 mt crude in June, according to customs data.

The VLCC New Caesar was the most recent ship to load US crude for China on August 7, having picked up 556,000 barrels of crude at Galveston for delivery at Ningbo port in eastern China, shipping data showed.

New Caesar has a capacity of 2.2 million barrels, and it is likely conducting more loadings in the Caribbean before heading to Ningbo.

Separately, China's independent refiners have been indirectly importing US-origin crude from storage terminals in north Asia, an alternative route for US barrels into the Chinese market.

Independent refiner Tianhong Chemical in July imported two 42,000-mt cargoes of Alaska North Slope crude from Gwangyang port in South Korea. It received three such cargoes in June, loaded at Yeosu, and one cargo of US Eagle Ford crude from China's bonded storage in May.

-- Eric Yep, Oceana Zhou, Andrew Toh; Analysis by Daisy Xu, newsdesk@spglobal.com

-- Edited by Manish Parashar, manish.parashar@spglobal.com