Analysis: Oil and gas traders fret over elevated risks in US-China trade
An unrealistic window for Chinese importers to ramp up purchases of US oil and gas, and unstable relations between the US and China have elevated the risks of US-China trades, according to market participants in China and Singapore.
Commodity traders said boosting purchases of US crude oil for a 90-day period is inconsistent with the normal trading cycle for physical barrels, and for natural gas the prevailing conditions in the Asian LNG market make an immediate increase in spot procurement very difficult.
In most cases, Chinese oil and gas companies will struggle with reconciling commercial interests with Beijing’s diktats, and are likely to take market positions that involve significantly higher risk.
Market uncertainties surged with the mid-week arrest of the chief financial officer of China’s Huawei Technologies in Canada after an extradition request by the US, the latest jolt to the trade war ceasefire.
Several Singapore- and Shanghai-based commodity traders said the incident forced them to reconsider any opportunities that had emerged after the trade talks between US President Donald Trump and Chinese President Xi Jinping last weekend.
The lack of details around the agreement has not helped market confidence.
While the White House explicitly stated a 90-day deadline from the weekend talks in Buenos Aires, it wasn’t until mid-week that the Ministry of Commerce confirmed it from the Chinese side.
The economic and trade teams of the two sides will actively promote the consultation work within 90 days in accordance with a clear timetable and road map, the ministry said in an interview transcript on its official social media account.
“China will start from implementing specific issues that have reached consensus, and the sooner the better,” a ministry spokesman said, adding that it had confidence in the deal’s implementation but not specifying any single commodity group.
CRUDE TRADING CYCLE
Chinese oil and gas companies had to wind down exposure to US energy supplies when the trade war escalated earlier this year, resulting in disruptions to trade flows, losses and general market uncertainty.
They could now be forced to ramp up trades in a short 90-day span ending March 1.
This is problematic for several reasons.
A Sinopec refinery typically submits its crude purchasing plan to the trading arm Unipec at least three months ahead of actual procurement, an executive with a Sinopec refinery, said. Additionally, it takes around 50-60 days for a crude cargo to be shipped from the US to China.
That is at least a five-month trading cycle for importing a US oil barrel into China, not counting the amount of time taken by Unipec to conduct spot trades.
Sinopec’s refineries will submit their crude purchasing plan for barrels delivered in March around December 15, but as of Thursday, they still had not received any notice from their headquarters to submit plans for US crudes, the executive at the refinery, which has processed US crude oil in the past, said.
“We had replaced US barrels with West African crudes after Unipec stopped purchasing the former grade [earlier this year],” another Sinopec refinery source said.
It would not be so easy to switch back refinery configurations, even though at current prices the margins for processing US crude oil are better than North Sea and West African grades.
Executives at Chinese independent refineries said they were still quite cautious about buying US crude due to the risks involved, but some were interested if prices are competitive. Refinery sources from state-run PetroChina did not comment on the possibility of purchasing US crudes.
A key sticking point is the 90-day window. A vessel that departs the US by end-December will barely make it to Chinese ports by the end of February when the deadline ends. But the Lunar New Year in February will mean that ports are congested and risks of delays are high.
LNG MARKET GLUT
In LNG, weak winter demand and growing global supplies have continued to depress Asian LNG prices, with the Platts Platts JKM for January delivery cargoes assessed at $8.806/MMBtu Thursday, down almost 9% from $9.635/MMBtu a week earlier, bucking seasonal price trends.
PetroChina and CNOOC, the main buyers of US LNG in China, have cut back on winter procurement of US spot cargoes as they are struggling with full tanks and continue to request suppliers for cargo deferments of contracted volumes.
That is not to say that Chinese winter gas demand is absent. In fact, LNG imports into Northern China touched all-time highs of 111-Mcm/d by end-November despite the relative warmth as coal-to-gas switching has kicked in, according to Platts Analytics.
However, the importers have largely anticipated this increase and are well stocked, leaving very little room for more spot cargoes, unless temperatures sink. The previous 10% tariff on US LNG is still in place and it’s unclear if this will be removed to facilitate imports.
Hence, LNG buyers in China will have to take extraordinary measures to increase US LNG imports in 90-days.