U.S. Oil Likely in China’s Cross Hairs as Trade War Deepens

After tensions escalated over the past week, some Chinese buyers will likely begin reducing purchases of oil from the U.S. in anticipation that Beijing will impose tariffs, according to traders who supply American oil to China, asking not to be identified due to company policies.

Retaliatory levies on U.S. natural gas and soybeans have already choked off China’s imports of those commodities. Adding crude oil to the mix disrupts further what should be a mutually beneficial energy relationship between the world’s biggest crude producer and importer. The U.S. surpassed Saudi Arabia and Russia to take the top spot last year, while China became the world’s largest oil buyer in 2017.

If U.S. President Donald Trump goes ahead with new tariffs threatened to begin Sept. 1, Beijing will likely retaliate with duties on most, if not all, of its U.S. imports, including oil, Michal Meidan, director of the China Energy Programme at the Oxford Institute for Energy Studies, wrote in a note.

Sinopec, China’s largest refiner, continues buying American oil, according to a person familiar with the matter. Unipec, the company’s trading arm, plans to load two supertankers with Bakken and Permian crude this month for shipment to its refining system and is looking for supplies in September, the person said.

It “looks like a tariff on crude oil is inevitable if things escalate,” said Li Li, an analyst at Shanghai-based commodities researcher ICIS-China.

One trader at a company that supplies China and has a long-term contract to buy U.S. crude said Beijing will probably apply retaliatory tariffs, though there has been no official notice of such a move. Two other traders who regularly sell American crude to China said they expect refiners to rein in purchases to show their support for President Xi Jinping, even if no tariffs are applied.

Sinopec’s imports of U.S. crude will continue unless prices are uneconomical or if an import levy is imposed, said a person familiar with the matter. That said, not all of Unipec’s purchases will necessarily end up in China, as the company has been reselling cargoes to other destinations in Asia and Europe where returns are more attractive.

Sinopec and PetroChina Co., the nation’s largest oil company, didn’t immediately respond to emails seeking comment.

While the oil trade between the U.S. and China isn’t large, losing access may leave some Chinese refiners struggling to find the lighter, low-sulfur oil that the U.S. produces. Those grades tend to yield cleaner fuels that are in high demand due to new international rules on shipping fuel, which take effect next year. The U.S. produced about 41% of the world’s low-density, low-sulfur oil in 2018, compared with about 14% in 2000, according to data from oil company Eni SpA.

China started buying oil from the U.S. in mid-2015, peaking in January 2018 at 2 million tons, or around 5% of total imports. Those purchases essentially halted between October and March due to the trade war, but rose again last quarter, reaching 769,000 tons in June.

Lighter crude grades that are similar in quality to U.S. oil are produced in the North Sea, parts of Africa, and central Asia. Chinese buyers have been buying more oil from the U.K. as the trade war intensified. Purchases have averaged 1.08 million tons per month this year, compared with 644,000 tons a month in 2018.

Brent crude fell into a bear market on Tuesday after dropping more than 20% from a peak in April. A disruption of U.S. oil flows to China would be a symptom of a worsening trade war, which may further crimp the global demand outlook, said Meidan at OIES.

“Even though U.S. exporters will find alternative destinations for these barrels,” Meidan said, “the prospects of an even shakier global economy will weigh on the oil complex.”