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Highlights

Tankers with US crude race to meet Sep 1 deadline

Traders use destination options to divert seaborne cargoes

Singapore — A handful of oil tankers carrying US crude to China are racing to beat the September 1 deadline when Beijing's 5% tariff on US crude imports will kick in, but not all will cross the finishing line on time.

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These seaborne cargoes underscore how the US-China trade conflict has elevated the risk for buyers and traders who were caught off-guard by the tariff announcement last week, and left scrambling to find options to resell or divert shipments while they were still at sea.

The risk was exacerbated amid Chinese buyers ramping up purchases of US commodities when trade tensions eased by the end of June, and the cargoes purchased since then had already sailed.

Two VLCCs -- Liberia-flagged Svet and Hong Kong-flagged Landbridge Prosperity -- are scheduled to arrive at Chinese ports just before the tariff kicks in, according to cFlow, S&P Global Platts trade flow software.

The 321,075-dwt Svet sailed from the Southwest Passage Lightering area in the US on July 7, and arrived at China's Qingdao port on Wednesday. The 308,285-dwt Landbridge Prosperity sailed from the Offshore Galveston Lighterage area in the US on June 30, stopped at Covenas for an additional cargo, and is scheduled to arrive at Rizhao port on Thursday.

The UK-flagged Suezmax tanker Energy Triumph loaded at Offshore Galveston Lighterage on July 7, and is also scheduled to arrive at Zhoushan on Thursday, ship tracking data showed. The lighterage areas are used to conduct reverse lightering -- loading small cargoes onto larger vessels -- as most US export terminals lack large berths for VLCCs.

Landbridge Prosperity was chartered by P66 for the US Gulf Coast-Singapore voyage, with an option for China, for a lump sum of $3.575 million and $4.575 million, respectively, while Energy Triumph was chartered for the US Gulf Coast-Ningbo voyage for $3.425 million by Mercuria, shipping fixtures showed.

These vessels will be the luckier ones. The majority of US crude shipments headed to China in the last few weeks will not make it before September 1, due to the roughly 55-day voyage. Furthermore, they have been tough to identify as their destinations have not been disclosed to avoid detection.

HEIGHTENED TRADING RISK

Singapore-based traders said seaborne shipments will be tough to resell as prompt cargoes have to be heavily discounted due to the last-minute sale, and it may be cheaper for buyers to simply pay the tariff.

Due to the ongoing uncertainty around US-China tensions, traders have also used destination options in fixtures, in case deliveries to China are jeopardized. These ships are chartered at dual rates depending on final delivery, such as Landbridge Prosperity.

In the week-ended August 23, just before China's tariffs were announced, US crude shipments to Asia were at 8.5 million barrels, nearly half of the total US seaborne crude exports of 18 million barrels for the week, ship tracking data showed.

China's crude oil imports from the US

China's US crude imports in July were at 1.5 million mt, or 11.2 million barrels, its highest monthly volume in a year, as previously bought cargoes continued to arrive at Chinese ports, customs data showed.

Volumes could remain elevated for August as traders try to accelerate deliveries before the September 1 tariff deadline, but are then expected to collapse again.

Unipec, the trading arm of state-run Sinopec, has a term contract for lifting 3-4 VLCCs of US crude every month, but it was also taken by surprise by the tariff announcement, a trader said.

However, traders with term contracts and international traders lifting US cargoes on an FOB basis typically hedge their risk through various mechanisms like alternative delivery options, the traders added.

US CRUDE IN ASIA

US crude oil exports are already above 3 million b/d on a weekly basis, and should exceed last year's average by over 1 million b/d by the end of the year, as well as add more than 1 million b/d next year, Ed Morse, global head of commodity research at Citigroup said in a note to clients last week.

The recent offer of US WTI Midland crude in Asia at a premium against Dubai was a testament to how far US oil had penetrated global markets, competing directly against light sweet crude in the region and in the Middle East, he said.

"US crude generally is priced against WTI. This development, with delivery in Singapore or Malaysia, allows Asian buyers to more easily compare US oil to other similar types of oil in the region," Morse added.

The attraction of US crude is being reinforced by refinery needs for meeting International Maritime Organization 2020 specifications, he said, adding that US supply growth has "an open highway to global markets" challenging Atlantic Basin balances and moving into the Asian market.

-- Eric Yep, eric.yep@spglobal.com

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

-- Catherine Wood, catherine.wood@spglobal.com

-- Vickey Du, vickey.du@spglobal.com

-- Edited by Shashwat Pradhan, shashwat.pradhan@spglobal.com