China’s Tariff on US Crude Likely to Have Little Impact
Beijing will impose a 5 percent tariff on U.S. crude oil from September 1st, but Chinese state-owned traders could keep importing at around 150,000 – 200,000 b/d from the U.S. for the rest of the year. Options include potential tariff waivers, storing the oil in bonded tanks, or diverting cargos to other Asian countries. To keep U.S. crude moving to China, a price differential of around $6 – $7 per barrel is required to cover transport and the tariff. This is possible as a flood of crude from new pipeline capacity carrying Permian Basin crude to the USGC would weaken WTI-Houston. Overall, we expect U.S. exports of crude to Asia to grow from 1.2 million b/d in the first half of the year to about 1.3 million b/d for the balance of 2019, regardless of China’s tariff on U.S. Crude.
Last Friday, Beijing announced a 5 percent tariff on U.S. crude oil from September 1st, among other retaliatory tariffs on a total of $75 billion worth of U.S. goods. This is the first time that Beijing has targeted crude oil, but U.S. cargos to China have already been affected by the trade war. According to the Chinese Customs, after Washington announced the first round of tariffs in June 2018, imports of U.S. crude oil dropped from their January-June level of 360,000 b/d to 270,000 b/d in JulySeptember. Then imports were halted for six months after the U.S. announced the second round of tariffs in September 2018. This year, Chinese buyers such as Unipec resumed imports of U.S. crude, with 160,000 b/d delivered in April-June, likely encouraged by false hopes that trade talks would make a breakthrough. This optimism further boosted imports when leaders of the two countries called a truce at June’s G20 meeting. Subsequently, 360,000 b/d of crude were delivered in July.
It is tempting to expect that, based on Chinese oil importers’ approach to the trade war, they could stop importing U.S. crude oil again for a few months after September 1st. While most private refiners will likely avoid U.S. oil, state-owned traders could keep importing at around 150,000 – 200,000 b/d for the rest of the year, since they have already tested the waters and probably found ways that best suit their interests in times of tension. Indeed, Unipec, China’s biggest buyer of U.S. crude oil, is reportedly seeking a tariff waiver for U.S. oil for the coming months. Other options that the company has include storing the oil in bonded tanks, or diverting U.S cargos to other markets, as it did in 2018. The most likely Asian destinations are South Korea, India, and Taiwan, with YTD imports of U.S. crude at 390,000 b/d, 250,000 b/d, and 190,000 b/d, respectively.
To keep U.S. crude moving to China, a price differential of around $6 – $7 per barrel is required to cover transport and the tariff, assuming current tanker rates of about $3.40 per barrel for a VLCC and about $3.00 per barrel for a Suezmax. With a flood of crude from new pipeline capacity carrying Permian Basin crude to the USGC, WTI-Houston should weaken, all else equal, and help maintain the needed differential to Brent for US crude exports to China, and to Asia generally. Furthermore, a flood of US crude arriving at USGC ports may encourage some producers who can afford it, to accept a lower price on their crude. While we estimate Permian Basin producers require an oil price of close to $55 per barrel for sustained longterm growth, in the short run, a price of only $34 per barrel covers all operating costs. Overall, we expect U.S. exports of crude to Asia to grow from an average 1.2 million b/d in the first half of the year to about 1.3 million b/d for the balance of 2019, regardless of China’s tariff on U.S. Crude.
Source: ESAI Energy