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ESAI Energy: China’s tariff on US crude likely to have little impact

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World Pipelines,

Last Friday, Beijing announced a 5% tariff on US crude oil from 1 September, among other retaliatory tariffs on a total of US$75 billion worth of US goods. This is the first time that Beijing has targeted crude oil, but US cargos to China have already been affected by the trade war. According to the Chinese Customs, after Washington announced the first round of tariffs in June 2018, imports of US crude oil dropped from their January - June level of 360 000 bpd to 270 000 bpd in July - September.

Then imports were halted for six months after the US announced the second round of tariffs in September 2018. This year, Chinese buyers such as Unipec resumed imports of U.S. crude, with 160 000 bpd delivered in April - June, likely encouraged by false hopes that trade talks would make a breakthrough. This optimism further boosted imports when leaders of the two countries called a truce at June’s G20 meeting. Subsequently, 360 000 bpd of crude were delivered in July.

It is tempting to expect that, based on Chinese oil importers’ approach to the trade war, they could stop importing US crude oil again for a few months after 1 September. While most private refiners will likely avoid US oil, state-owned traders could keep importing at around 150 000 - 200 000 bpd for the rest of the year, since they have already tested the waters and probably found ways that best suit their interests in times of tension. Indeed, Unipec, China’s biggest buyer of US crude oil, is reportedly seeking a tariff waiver for US oil for the coming months. Other options that the company has include storing the oil in bonded tanks, or diverting U.S cargos to other markets, as it did in 2018. The most likely Asian destinations are South Korea, India, and Taiwan, with YTD imports of US crude at 390 000 bpd, 250 000 bpd, and 190 000 bpd, respectively.

To keep US crude moving to China, a price differential of around US$6 - US$7/bbl is required to cover transport and the tariff, assuming current tanker rates of about US$3.40/bbl for a VLCC and about US$3/bbl for a Suezmax. With a flood of crude from new pipeline capacity carrying Permian Basin crude to the USGC, WTI-Houston should weaken, all else equal, and help maintain the needed differential to Brent for US crude exports to China, and to Asia generally. Furthermore, a flood of US crude arriving at USGC ports may encourage some producers who can afford it, to accept a lower price on their crude. While we estimate Permian Basin producers require an oil price of close to US$55 per bbl for sustained long-term growth, in the short run, a price of only US$34 per bbl covers all operating costs. Overall, we expect US exports of crude to Asia to grow from an average 1.2 million bpd in the first half of the year to about 1.3 million bpd for the balance of 2019, regardless of China’s tariff on US crude.

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