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China to impose 5% tariff on US crude from Sep 1: State Council

Singapore — China's plans to levy 5% tariff on US crude imports from September 1 caused a drop in benchmark crude prices Friday, jeopardized seaborne US crude shipments heading to China and limiting buying interest in US crude from Chinese refiners.

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This is the first set of tariffs imposed by China on US crude so far, despite other key US energy products such as LNG already facing a 25% tariff by Beijing since the trade conflict began last year.

China's latest levy on US crude is part of new tariffs on $75 billion worth of US goods imports that will be implemented in two batches from September 1 and December 15, the State Council's Tariff Commission said in a statement Friday on the Ministry of Finance website.

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It said the tariffs are in retaliation for the US government's 10% tariff on around $300 billion worth of Chinese goods announced on August 15, despite the two countries arriving at a truce on the sidelines of the G20 meeting in Japan.

"The US measures have led to the continuous escalation of China-US economic and trade frictions, which have greatly harmed the interests of China, the US and other countries, and have also seriously threatened the multilateral trading system and the principle of free trade," the statement said.

Oil prices fell following Beijing's tariff announcement, with energy and financial market participants unwinding their long paper positions on concerns over a wider slowdown in China as the trade row escalates and its detrimental impact on oil demand.

Crude futures, which had been slightly lower overnight, plunged more than a dollar following the tariff announcement to session lows of $58.37/b for Brent and $53.47/b for WTI in Friday's trade.

"[The tariff] continues to keep focus on worries that trade issues will impact global demand," Tradition Energy analyst Gene McGillian said. "It basically points toward fears that the trade crisis isn't going away."

PHYSICAL MARKET IMPACT

China and Singapore-based oil traders and refiners with exposure to US crude reacted negatively to the announcement.

"The impact is not small, although the WTI crude price is only around $50/b plus," a China-based oil refinery executive said.

The executive said shipping costs from the US have risen over the last few days, costing around $4/b, along with a few dollars of premium for spot bookings. If an additional 5% tariff is added to the shipment, the cost will rise by $2-$3/b at a time when refinery margins in China have been under pressure this year, the executive said.

"Forget $2-$3/b, even a 50-cent increment is not affordable for Chinese refiners now," the executive said, adding that refiners would need to apply for tariff exemptions first, or have to trade and divert the cargoes to other destinations.

Chinese refinery margins have been hurt by higher crude purchasing costs. On Wednesday, Shanghai Petrochemical's crude processing cost in the first half of 2019 rose 7.9% year on year to Yuan 3,309.34/mt ($72.20/b), the company said in a results statement.

However, other traders said the drop in benchmark crude prices could help absorb the impact of the tariff and the arbitrage window for US crude to China is still possible, while an oversupplied market leaves traders with alternative barrels to tap into.

Additionally, the uncertainty of looming tariffs is over for the coming weeks, and a 5% confirmed tariff for the next few months is better than not knowing what the next move in the trade dispute will be.

Chinese crude oil traders in general have been shying away from US crude due to tariff uncertainties, despite state-run Unipec, the trading arm of China's largest refiner Sinopec, having long-term contracts to purchase about three to four VLCCs of US crude a month

In late June, the reopening of negotiations between the US and China was accompanied by Beijing's promise to buy more US-origin commodities, leading to an uptick in US crude loadings for China.

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, S&P Global Platts trade flow software.

But with thin margins and the 5% tariffs, the chances of these barrels discharging at Chinese ports has become slim, and traders are likely to seek opportunities to resell or swap them on the market in coming weeks.

-- Oceana Zhou, Eric Yep, Philip Vahn and Christopher Vanmoessner, newsdesk@spglobal.com

-- Edited by Jonathan Dart, newsdesk@spglobal.com