Viewpoint: US crude will flow around China tariffs

Retaliatory Chinese tariffs on US energy imports are unlikely to curtail overall US oil exports, which will likely shift to Europe and smaller Asia-Pacific countries.

China increased its US crude intake nearly 85pc year-on-year to become the top destination for US exports in the first half of this year. The US shipped about 350,000 b/d of crude to China from January to May, from less than 190,000 b/d in the same period of 2017 and just 10,000 b/d in the first five months of 2016, according to July US Census Bureau data.

Total US crude exports have more than doubled in since 2016to about 1.68mn b/d year-to-date. Preliminary tracking data compiled by Argus indicates outbound volumes may top out at 2mn b/d this year, constrained until major infrastructure projects to move crude from the key Permian basin region to coastal ports come online in late 2019 and 2020.

The growing US-to-China trade came under threat on 15 June, when the US announced plans to deepen it's trade battle with China and impose a 25pc tariff on $50bn/yr of Chinese imports starting 6 July. That sparked threats from Beijing to reciprocate proportionately on US imports starting in August, potentially affecting cargoes already in transit.

US West Texas Intermediate (WTI) crude sourced from Midland, Texas, averaged a roughly $1/bl discount to both Nigerian Bonny Light crude and North Sea Ekofisk on a delivered basis to China during the first half of 2018. The new Chinese tariffs would push delivered WTI prices to premiums of $20/bl or higher relative to those competing international grades.

The arbitrage would likely remain workable to other Asia-Pacific countries like Taiwan and South Korea, which together have already purchased at least 37.76mn bl, or about 250,000 b/d,of WTI, Southern Green Canyon (SGC) and Mars for delivery through October. The US exported about 150,000 b/d in the first five months of this year to the two countries, compared to just 33,000 b/din the same time frame of 2017. Exports to Taiwan and South Korea totaled 18.61mn bl in the second half of last year, or just shy of 60,000 b/d.

West African, Mideast Gulf and North Sea crudes are probable substitutes for US supply in China, positioning the US to step in to fill any subsequent shortage in Europe and Mediterranean countries that typically import the same grades.

The US exported 557,000 b/d of crude to Europe from January to May. That figure is poised to top 700,000 b/d in the second half of 2018 on strong buying interest in Italy, the Netherlands and the UK and the expectation that Chinese demand will help raise values for competing crudes.

WTI averaged a roughly 5¢/bl discount to Abu Dhabi's light sour Murban on a delivered basis to the Mediterranean during the first half of 2018. The spread has already widened substantially, with delivered WTI averaging a $1.13/bl discount to Murban since the start of July and touching a roughly $2.65/bl discount on 25 July.

Current fundamentals suggest Mideast Gulf crudes will continue to strengthen relative to WTI for cargoes delivered through September, which will support US crude as a more economical alternative.