Viewpoint: US crude flows resume trickle to China

Chinese buying interest for US crude is re-emerging after a months-long absence during a tariff dispute between the two countries.

A temporary truce called in the six-month-old US-China trade war will stall a 25pc tariff rate on $200bn/yr of US imports from China and maintain the current cost to Chinese refiners of importing US crude.

State-owned Chinese firms Petrochina and Sinochem have each placed a very large crude carrier (VLCC) on subjects to load US crude cargoes totaling up to 4mn bl in late December. The Arafura and Manifa would arrive in China in the first half of February, marking what would be the first fully loaded tankers to arrive with US crude since September.

Crude from the US is positioned to step in as a key alternative to Mideast Gulf supplies following a fresh Opec/non-Opec agreement to curtail global production by 1.2mn b/d in the first half of 2019. The output deal will likely elevate international crude prices relative to US benchmark West Texas Intermediate (WTI) to support the arbitrage for US exports.

After China became the top destination for US exports in early 2018, Chinese refineries backed out of the US Gulf coast market in late July following a US announcement earlier that month to deepen it's trade battle with China and impose a 25pc tariff on $50bn/yr of Chinese imports. That sparked threats from Beijing to reciprocate proportionately on US imports starting in August.

Large Chinese buyers like Unipec backed out of previously purchased US cargoes on expectations that the new tariffs could push delivered premiums $20/bl higher than competing Mideast and west African crudes. The sudden drop in demand led to a temporary surplus of waterborne light sweets at the US Gulf coast and fob WTI values falling to discounts to Argus WTI Houston — meaning waterborne prices would not even cover the transportation costs to the docks.

The US shipped no crude to China from August through October, according to the latest available monthly statistics by the US Census Bureau.

US producers have since restarted marketing cargoes to China, with flows now limited by traditional arbitrage economics. But demand remains limited in China on cheaper crude alternatives, pushing US crude to Europe and smaller Asia-Pacific countries instead for the near-term.

WTI crude sourced from Midland, Texas, averaged a roughly $1.25/bl discount to Nigerian Bonny Light crude and $1.75/bl discount to North Sea's Ekofisk on a delivered basis to China during the second half of 2018. This indicates a workable arbitrage from the US to China for cargoes loading in the first quarter of 2019.

But the US granted China a waiver to sanctions placed on Iranian oil imports, allowing China to continue importing from the Mideast country for the next six months. Lower Iranian crude prices spurred by curtailed demand amid the sanctions would compel the handful of Iran's remaining trade partners to boost purchases while they still can.

But official government selling prices for Iranian crude have yet to catch up with lower demand, with Iranian Light averaging a 90¢/bl premium to WTI on a delivered basis to China in the second half of 2019. Even if Iranian supply reached a discount to competing crudes, net-importer China will still need to supplement purchases with additional imports.