US oil is likely to be China’s next target as trade war rages, energy analysts warn

GP: China Oil Imports tanker 180704
An oil tanker sits beside transfer pipes at a terminal as it prepares to unload its cargo of fuel
on July 4, 2018 in Zhoushan, China. VCG | Getty Images

China is expected to dramatically reduce its intake of U.S. crude imports over the coming weeks, energy analysts have warned, following the latest flare-up in trade war tensions between the world’s two largest economies.

The tit-for-tat tariff dispute between the U.S. and China has already sent oil prices plunging, in large part because of worries about a severe global economic slowdown and potentially even a U.S. recession.

Wednesday’s session saw crude drop at one stage to a seven-month low.

President Donald Trump raised the stakes in his administration’s protracted dispute with Beijing last week, threatening to impose new charges against the country from September 1.

The U.S. has since accused China of being a currency manipulator, as the yuan sank to levels against the dollar not seen in more than a decade.

In response, energy analysts expect China to target U.S. oil imports.

“I think it is a virtual shoo-in that volumes will slow to a trickle and may even grind to a complete halt,” Stephen Brennock, oil analyst at PVM Oil Associates, told CNBC via email.

Chinese buyers recently rekindled their interest in U.S. crude, as imports climbed to a nine-month high of 247,000 barrels per day in May, according to figures from the Energy Information Administration (EIA).

However, Brennock said the latest ramp-up in trade tensions would most likely reverse this trend.

“The outlook for China-bound U.S. crude shipment is firmly skewed to the downside,” he added.

Chinese buyers ‘worried’ about tariffs

China, the world’s largest oil buyer, was one of the leading destinations of U.S. crude throughout the first half of last year — in what had been a mutually beneficial energy relationship with the world’s biggest crude producer.

However, Beijing’s U.S. crude imports plummeted almost immediately after the trade war talk started, with flows completely drying up at the turn of the year as the situation deteriorated.

Separate data sourced by ClipperData showed that China’s intake of U.S. crude surged to a 10-month high in July.

But, Matthew Smith, director of commodity research at ClipperData, told CNBC via email that with China now running out of goods to target, Chinese buyers would be “worried” about tariffs being placed on crude.

Oil prices

International benchmark Brent crude traded at $57.31 Friday morning, down around 0.15%, while U.S. West Texas Intermediate (WTI) stood at $52.50, almost 0.1% lower.

Both crude contracts fell to their lowest level since January on Wednesday, following a week of turmoil exacerbated by worsening U.S.-China trade tensions.

Michal Meidan, director of the China Energy Programme at the Oxford Institute for Energy Studies, said in a research note that China would probably impose charges on most, if not all, of its U.S. imports, including oil, if Trump pressed ahead with new tariffs at the start of September.

Meidan also warned that since the U.S. had already taken Chinese telecoms giant Huawei to task, it was no longer inconceivable it would consider designating a Chinese oil and gas major.

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