U.S. Oil's Pricing Allure Risks Being Dulled by China Tariff

(Bloomberg) -- China’s planned levies on U.S. crude as part of an escalating trade dispute threatens to dim the attractiveness of American supplies in the world’s biggest oil-importing nation.

Crude pumped from the shale fields of Texas and wells in the Gulf of Mexico have been increasingly finding their way to Asia as American oil turned relatively cheaper versus supplies from other parts of the globe. While China has been the top importer of cargoes in the region, its proposed tariffs risk eroding the benefit from U.S. crude’s discount over other benchmarks that had opened the door for arbitrage shipments to flow east.

The Asian nation imported 18.4 million barrels of American crude and oil products in March, making it the third-biggest customer behind Mexico and Canada. Still, that accounts for only a small fraction of its overall purchases, meaning it’s unlikely to be significantly hurt by any curtailment of U.S. crude. The dispute could spur Chinese refiners to turn to Middle East suppliers including the U.A.E. as well as Iran, which is under pressure from sanctions by Donald Trump’s administration.

If the tariffs are implemented, “current flows of U.S. arbitrage crude to Asia could be affected, as it’ll be an extra cost that Chinese buyers will need to factor in when importing American supply,” said Den Syahril, an analyst at industry consultant FGE in Singapore.

The U.S. and China moved to the brink of a trade war on Friday after the Trump administration announced new tariffs on imports would take effect from July 6. In response, the Asian nation said it would charge duties of the “same scale and intensity” on goods from America, adding that all trade commitments made during the previous weeks of negotiations are now off the table.

Trade Negotiations

China’s list included a variety of agricultural products, including soybeans, corn and wheat along with beef, pork and poultry, plus automobiles. A second set of tariffs to begin at a later date covered other goods including crude oil, gasoline, coal and medical equipment.

The impact on demand from tariffs, if implemented at proposed levels, would likely be modest at 20,000 to 40,000 barrels a day, and will require U.S. crude to flow to Europe instead, Goldman Sachs Group Inc. said in a report.

“The U.S. is expected to face internal headwinds in imposing duties on Chinese goods, so it’s hard to say at this point that it’ll develop into a full-blown trade war,” Kim Kwangrae, a commodities analyst at Samsung Futures Inc., said by phone. “Since the U.S. isn’t immediately slapping duties on Chinese goods and there’s time until July 6, I believe the doors are still open for further negotiations.”

Oil Shortage

The flaring trade tensions are threatening to affect crude shipments just as the oil-market faces a shortage on a potential drop in Iranian crude exports due to U.S. sanctions and a slump in Venezuela output because of economic turmoil. China has said that it opposes any country imposing unilateral sanctions against another nation, and that Beijing will continue its cooperation with the Persian Gulf state.

“China may open up the prospect for taking in larger volumes of Iranian crude to replace the U.S. grades,” said John Driscoll, the chief strategist at JTD Energy Services Pte.  “Historically, China has never been intimidated by U.S. trade sanctions and boycotts. Ironically, the Trump tit-for-tat trade war could result in a win for Iran, which is not the outcome the White House intended.”

Meanwhile, Saudi Arabia and Russia -- among the top oil suppliers to China -- want to reach a deal to increase production when the Organization of Petroleum Exporting Countries and its allies meet in Vienna this week.

“Oil supplies are fungible and U.S. crude exports to China could simply be redirected to importers who lose supply as China in turn imports additional volumes from OPEC,” analysts including Sam Margolin wrote in a Cowen and Co. report on June 17. “Therefore, the OPEC decision this week is critical to the outlook for the impact of these potential tariffs.”

Crude demand in China is growing at a faster rate than other countries due to new refining capacity, and the absence of a key growth market could still trap oil supplies in the U.S., the analysts wrote.

To contact the reporters on this story: Serene Cheong in Singapore at scheong20@bloomberg.net;Heesu Lee in Seoul at hlee425@bloomberg.net;Sharon Cho in Singapore at ccho28@bloomberg.net

To contact the editors responsible for this story: Pratish Narayanan at pnarayanan9@bloomberg.net, Anna Kitanaka

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