China drops US crude from tariff retaliation: Update

Adds details throughout, market reaction.

China will impose a 25pc tax on most US commodity imports beginning on 23 August — but it is exempting crude from its retaliatory measures to US tariffs that go into effect the same day.

China's Ministry of Commerce today published the list of imports from the US it has slated for tariffs in response to the second tranche of US duties announced yesterday. Beijing originally publicized its intent to target burgeoning US crude imports with a punitive tax, but the commodity is not on the list published today.

The Chinese government did not provide an explanation, other than noting that it adjusted the list based on "the opinions of relevant departments, industry associations and enterprises, in order to protect the interests of domestic consumers and enterprises to the greatest extent."

An industry insider in China expressed relief at the exemption, crediting the ministry with paying attention to the advice it received. "Crude is a commodity mattering in people's livelihood and countries' energy security, and crude imports from the US have good economics," the source said.

China imported about 510,000 b/d from the US in June, as Asia-Pacific has become an increasingly important market for US crude. US crude exports hit a record high that month of 2.2mn b/d, with China as the top destination.

China's largest refiner, state-controlled Sinopec, last week said it would back off imports of US crude as that commodity was expected to be affected by tariffs.

Waterborne US crude prices may be poised to rise on the re-emergence of Chinese buyers in the spot market, although values remain static so far this morning. Midland WTI was offered at a 75¢/bl premium to Argus WTI Houston on an fob basis this morning, reflecting a roughly 25¢/bl increase compared to the level it was valued in recent weeks. But the offer failed to immediately spark buying interest as the WTI/Brent remains relatively narrow and the export arbitrage difficult to work.

Nearly every other energy commodity originally slated for retaliation remains on the list, including petroleum coke and coal.

China was the largest importer of US petroleum coke in the first half of this year, taking almost 12pc of US green and calcined coke exports.

LNG exports remain exempted from retaliatory measures, but that could change if the US proceeds with a potential third tranche of tariffs in late September or early October.

All in all, US tariffs in force, scheduled to take effect or under consideration would affect more than $250bn/yr of imports from China, about half of the total. Retaliatory measures announced or enacted by Beijing would affect $110bn/yr of US exports to China — nearly 85pc of the total.

President Donald Trump said yesterday the US would prevail in the trade war and predicted it would eventually result in a "fantastic trading relationship" with China.