Singapore — China has stepped up its purchases of US crude oil in recent trading cycles in an effort to comply with the Phase 1 trade deal with Washington struck in January, but low oil prices may severely impede Beijing's efforts to meet the purchase target for energy products in terms of dollar value.
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The acceleration of purchases comes at a time when a review of the trade deal due over the weekend was postponed indefinitely, but tough market conditions this year mean that any targets dependent on a revival of the economy or energy demand will be out of reach.
These include coronavirus-related destruction of demand for transport fuel, poor downstream economics as Asian refinery margins are wafer thin, no sign of recovery for key products like jet fuel, and swelling queues of VLCCs waiting weeks to discharge crude cargoes at Chinese ports.
State-owned Chinese oil companies returned to buying US crude oil for September-loading and the volume is expected to exceed the last buying spree in May, according to trading sources.
At least seven China-bound cargoes, carrying around 14 million barrels of crude, have been scheduled for September loading in the US Gulf Coast in recent days with China as their destination, S&P Global Platts fixtures data showed. These will arrive through October-November.
Meanwhile, August is on track to have the largest amount of US crude delivered to China in a given month, expected to cross 30 million barrels, according to data intelligence firm Kpler. This reflects the resumption of US crude loadings in May and June, after a four-month hiatus, while China's economy started to recover from the pandemic.
US crude arrivals in China in August will be double the previous high of 14.71 million barrels in January 2018 recorded by China's General Administration of Customs. As a result, around 85 million barrels of US crude will be delivered to China by September, Kpler data showed.
By comparison, China imported 376 million barrels of crude in total in July, GAC data showed.
Crude price plunges
In terms of value, China's crude imports from the US for the first three quarters of 2020 may reach around $3.42 billion based on the average Dated Brent price of $40.87/b up to August 17 this year.
If China can import 10 VLCCs (20 million barrels) of US crude a month in the fourth quarter, worth $100 million each at an oil price of $50/b, it would only amount to another $3 billion, a trader with a US crude supplier said. China's state-owned refineries can accommodate a maximum of 10 VLCCs of light US crude a month due to their configuration.
This far below the Phase 1 commitment, which calls for an additional $18.5 billion of US energy purchases in 2020 over 2017 levels, and $52.4 billion worth of purchases over 2017 levels across the next two years.
China's purchases of US energy goods, including crude, LNG and petrochemicals, amounted to only about $2.9 billion by the end of June, way below the target, according to Panjiva, a business line of S&P Global Market Intelligence that provides news and analysis about global supply chains.
Crude was expected to take the lion's share of the purchases, on account of it being a high-value commodity, but its price has taken a pummeling in 2020.
In 2017, China imported about 153,000 b/d of US crude oil that was worth $3.2 billion at an average price of around $57.59/b, customs data showed. Dated Brent fell to a year-low of $13.24/b in April from as high as $69.96/b in early January.
In addition, small-scale independent refineries, which account for over a quarter of China's refining capacity, are running out of crude import quotas.
The independents were the first Chinese refineries to buy US crude in May, when imports of US crude resumed, and accounted for a large portion of the volumes till August, Platts data shows.
Without them, the onus for US crude procurement falls on state-owned refineries who are a lot less flexible in changing their crude slate.
One Sinopec refiner told Platts that state-trader Unipec has been trying to push them to buy West Texas Intermediate crude, but the refinery has been reluctant due to the high volume of light distillates that don't have buyers in the current market.
A surge in tanker freight rates in the first half of this year, despite the contango in crude prices, also closed the arbitrage window for China to import US oil. Additionally, rapidly deteriorating US-China relations mean that no Chinese refiner wants to expose their crude shipments to the vagaries of geopolitics.