On Aug. 1, US President Donald Trump announced that the US will impose a 10% tariff on $300-billion worth of Chinese imports effective Sept. 1. The new tariffs simply mean that all of China’s exports to the US will effectively be taxed.
In this ensuing tit-for-tat trade war, China has levied tariffs on a wide variety of US products, from LNG to soybeans, machinery, grains, and aircraft parts. Despite the growing tensions, however, US crude oil has so far been spared from the tariffs.
Some traders and analysts expect that America’s new tariff threat might change this situation. “China’s retaliatory duties will widen to cover most, if not all, of its imports from the US, including crude oil,” said Michal Meidan, director of the China Energy Program at the Oxford Institute for Energy Studies (OIES).
Notably, even with US crude oil being a target of possible Chinese retaliatory tariffs, that would not hurt US crude oil exporters much further, as US crude oil is currently not an essential trade item between the two countries as it was in the past. Amid surging uncertainties, Chinese buyers are unlikely to sign any long-term purchase agreements with US crude oil exporters.
During August-November 2018, US crude oil exports to China were nearly zero. In this year’s first quarter, the US exported 80,000 b/d of crude oil to China, down from 357,000 b/d in first-quarter 2018. While hopes that a deal would be reached led to an uptick in flows in May and June, the recent escalation will soon send the volumes back to zero again.
However, the absence of Chinese buyers, to some extent, merely means country-specific shifts to US crude oil exporters. Canada, South Korea, the Netherlands, India, and the UK picked up the slack by increasing their US crude purchases. Over this year’s first half, US crude oil exports rose to 2.8 million b/d from 1.76 million b/d in last year’s first half.
A weakening complex
The trade battle between the world’s two largest economies is unlikely to be resolved anytime soon and the Chinese economy will continue to slow. China’s gross domestic product growth for this year’s second quarter was 6.2%—the lowest growth rate for any quarter since estimates began in 1992.
China’s oil and gas demand growth is set to tumble from 2018 levels. Unipec, Sinopec’s trading arm, has been expecting product demand growth of just over 300,000 b/d this year, half the growth level seen in 2018.
In addition, the July manufacturing Purchasing Managers’ Index for the Eurozone and Japan all indicated contraction in manufacturing activity as well, contributing to continued demand-side concerns of the global oil market.
Although US exporters will find alternative destinations for their barrels, the whole global oil complex is subdued with a weakening global economy and slowing global oil demand growth.
Following Trump’s new tariff threats, Brent and West Texas Intermediate crude prices fell more than 7% on the day of his annoucement.
China’s crude imports
Amid the trade war, China’s crude oil import structure also is changing.
China is a huge consumer of crude oil. However, China’s domestic production costs are higher than import costs, which leads to a high foreign oil dependence of 72%. China always wants to diversify its crude oil imports for the sake of energy supply safety.
The emergence of US crude after the lift of the exporting ban was very welcome, as it helps to form a stable supply pattern for crude oil in China. However, the honeymoon period lasted less than 2 years.
Recently, Russia—the largest supplier of China’s oil for 3 consecutive years—has been overtaken by Saudi Arabia. In June, China imported 7.72 million tons of crude from the Saudis, which is becoming China’s largest supplier of oil, up 84% year-on-year. Russia and Angola ranked respectively second and third.
This change is not difficult to explain. Saudi Aramco and China’s many refinery projects have entered into force, and the increase in supply has become inevitable.
