Analysis: US-China trade tension unlikely to curb US-Asia crude flows as Taiwan steps up
China’s appetite for US crude oil seems unlikely to show any meaningful recovery in the second half of 2019 amid prolonged Washington-Beijing trade tension, but the overall US-East Asia crude flows may still flourish as Taiwan continues to fill the demand gap left by Chinese buyers.
China — Asia’s biggest importer of US crude oil in 2018 — has put sharp brakes on light sweet and medium sour US crude purchases since October last year amid the US-China trade dispute.
China imported 6,991 b/d of crude from the US in Q1, down significantly from 316,771 b/d received in the same period a year earlier, according to data from General Administration of Customs.
US-origin crude imports to China recovered to 116,750 b/d in April, the latest GAC data showed, but only a few Chinese refineries have booked US crude cargoes for May-July delivery, traders and analysts with knowledge of the matter said.
China has backed off from purchasing US crude despite no actual tariffs being implemented till date, and a tense standoff in trade relations between Beijing and Washington makes it unlikely that crude flows will rebound sharply anytime soon.
US President Donald Trump has threatened to impose 25% tariffs on the $300 billion worth of Chinese goods that have not been targeted so far, leaving room for an escalation of the trade dispute on both sides.
The outcome of the upcoming G20 summit in Osaka will likely determine the next phase of the trade spat.
On the contrary, Taiwan has emerged as one of the most important customers for US crude suppliers, bursting into the ranking of top three buyers of North American oil in Asia this year and making up for China’s sharp drop in US oil purchases.
US crude exports to Taiwan reached 15.73 million barrels in Q1, more than a twofold jump from 6.87 million barrels shipped in the same period a year earlier, according to the US Energy Information Administration data.
A fresh wave of crude cargoes loaded in the US Gulf Coast are bound to reach Taiwan in late Q2 and Q3 as well, according to S&P Global Platts reports.
Platts previously reported, citing Asian market sources with knowledge of the trade deals, that Taiwan’s CPC Corporation bought at least 4 million barrels of WTI Midland crude via spot tender seeking sweet crude cargoes for delivery in June.
The state-run refiner was also said to have bought 6 million barrels of WTI Midland crude for delivery in July from unknown sellers, at a premium of around $2.75/b to the Platts Dated Brent, CIF Taiwan.
Most recently, CPC, the country’s main buyer of US crude, bought 600,000 barrels of light, sweet Bakken crude in its tender last month seeking sweet crudes for delivery in August. This was the company’s first purchase of the grade, in addition to around 5.4 million barrels of WTI Midland crude bought in the same tender for August-arrival.
Overall, US crude exports to East Asia’s top six buyers year to date — South Korea, Taiwan, Thailand, China, Singapore and Japan — totaled 83.76 million barrels in Q1, up 75% from 47.99 million barrels a year earlier, the EIA data showed.
ACTIVE ARBITRAGE PLAYER
Taiwan continues to capitalize on WTI’s attractive price tag, with its refiners shifting focus further away from some of their typical diet Middle Eastern sour crudes linked to Dubai prices and Angolan light sweet Cabinda and Nemba grades priced against the European price benchmark.
The outright price spread between WTI MEH and Abu Dhabi’s light sour Murban crude, both on Asia delivered basis averaged minus 23 cents/b to date in 2019, Platts data showed.
The spread between WTI MEH on a CFR North Asia basis and Angola’s Cabinda crude on a FOB basis averaged $1.83/b to date this year.
The freight netback to send crude oil to Singapore from Angola averaged $2.34/b year to date, Platts data showed, essentially putting the light sweet US crude at a discount against the light sweet West African grade on a delivered basis.
Industry sources said Taiwan has also been keen to ensure their sweet crude supply is adequate, ahead of the stricter marine fuel standards being imposed by the International Maritime Organization in 2020 that will require increased consumption and blending of lower sulfur refinery feedstocks.
CPC began supplying low sulfur fuel oil at five ports — Keelung, Taichung, Kaohsiung, Suao and Hualien — from January 1, 2019. This followed after the Ministry of Transportation and Communication’s early adoption of the 0.5% sulfur cap from January 1, 2019.
SOUTHEAST ASIA CHIPS IN
Two new Southeast Asian buyers have also burst into the North American crude arbitrage trading scene for the first time this year, contributing to yet another year of ample US-Asia crude flows.
With official selling prices and spot differentials for various light sweet Southeast Asian crude grades rising sharply this year, major refiners in the region have also decided to join the Taiwanese bandwagon to actively capitalize on the attractive US price tags.
Vietnam’s 148,000 b/d Dung Quat refinery has received its first ever cargo of WTI crude in late April, an official at refinery operator Binh Son Refining and Petrochemical told S&P Global Platts previously.
Indonesia’s state-run Pertamina also bought its first cargo of US crude in a recent trading cycle. The cargo of light sweet WTI Midland crude will arrive in Indonesia sometime later this month, a company source said.