Oil traders ready for musical chairs as China tariffs loom

NEW YORK: Oil markets are bracing for a reshuffle of global trade flows as China threatens to impose tit-for-tat tariffs on imports of US energy products, including crude. China, which has bought an average 330,000 barrels per day (bpd) of US crude oil this year, is threatening to place a 25 per cent tariff on various US commodity exports, including crude oil, although it is so far unclear when such a measure would come in place. The decision came in response to US President Donald Trump saying he was pushing ahead with hefty tariffs on $50 billion of Chinese imports.
And it triggered an aggressive response by Trump, who on Monday threatened to slap a 10 per cent tariff on $200 billion of Chinese goods in addition to the import duties previously announced.
The tariffs could restrict the flow of US barrels going to China — a business now worth almost $1 billion per month About 14 million barrels of US crude are set to arrive in China in July, which would be the highest monthly figure on record.
An import duty would make US oil less competitive than other crudes, almost certainly resulting in a sharp fall of Chinese purchases, forcing US oil firms to find other buyers.
In the first three months of this year, US crude made up around 5 per cent of China’s total crude imports, according to Chinese customs data.
“It’ll take the (US oil) industry a few months to find new outlets,” said Scott Shelton, a broker at ICAP in Durham, adding that US crude flows to Europe and the Mediterranean will likely pick up. Outside China, however, WTI remains near a $10 per barrel discount to Brent.
Many traders expect this discount to widen further should the flow of US oil to China slow, meaning that other producers would have to deal with high volumes of cheap American oil becoming available in other big markets, including Europe.
China, in turn, is likely to replace the US oil with increased purchases from top suppliers Russia and Saudi Arabia.
Saudi and Russia are already pushing for an increase in production at a meeting of The Organization of the Petroleum Exporting Countries (Opec) this week. “I think it would create a carousel affect where China then buys more alternate grades and other importers buy more US grades,” a US-based trader with a global merchant said. — Reuters