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A Storm Is Brewing For U.S. Oil Exports

Two geopolitical developments in recent weeks—U.S. sanctions on Iran and the escalating U.S.-Chinese trade war—are set to reshuffle the U.S. oil flows to the world’s fastest-growing oil market, Asia.

On the one hand, the United States is pressing Iran’s oil customers to cut their Iranian crude imports by as much as possible. China is Tehran’s biggest oil buyer, and India is its second. While India is reportedly preparing for a drastic reduction of Iranian oil imports, China will continue to buy Iranian oil.

On the other hand, China is threatening to impose a 25-percent tariff on U.S. crude oil and oil products after the U.S.-Chinese trade war took a turn for the worse in recent weeks. Such a tariff would make American crude oil uncompetitive in China, and U.S. oil sellers will have to find alternative buyers for their crude to replace the volumes they are currently selling to their second-largest oil customer after Canada.

India is an obvious possibility—its imports and demand are surging, and it may be willing to replace at least part of its Iranian oil imports out of fear that its companies and the sovereign could lose access to the U.S. financial system should it continue to buy Iran’s oil.

But the problem with India possibly replacing Iranian oil with U.S. crude is that American light oil isn’t a substitute for heavy high-sulfur Iranian crude.

India began regular U.S. imports last year, but the volumes are currently small, especially compared to the U.S. crude exports to China, EIA data shows. But in May, India’s imports of U.S. crude oil jumped by nine times the April volumes—signifying that at least a partial switch is already underway. Related: Asia Is Leading The Renewable Energy Race

“Shale crude is not an alternative to Iranian crude,” Sandy Fielden, director of research for commodities and energy at Morningstar, told Bloomberg. “Indian refiners can’t absorb all the U.S. oil that was going to China. They can import more, but can they process it?”

If China follows through with its threat to slap tariffs on U.S. oil imports, it would put downward pressure on the WTI Crude benchmark and widen its discount to Brent Crude, which could be make U.S. oil even more attractive to Indian buyers, according to Fielden.

Still, analysts doubt that the United States will be able to easily find alternative buyers for the oil it has been selling to China.

India may raise its U.S. oil imports, but it would hardly be able to replace all the American oil that a Chinese tariff could possibly cut off.

“While China could secure the crude from alternative sources, such as West Africa which has a similar quality to U.S. crude, the U.S. would find it hard to find an alternative market that is as big as China,” Suresh Sivanandam, senior manager, Asia refining, at Wood Mackenzie, said last month, commenting on the impact of possible Chinese tariffs on U.S. oil imports.

According to WoodMac, U.S. crude oil exports to China averaged around 300,000 bpd in the first quarter this year, accounting for just over 20 percent of all U.S. crude oil exports.

One Chinese buyer is said to have already suspended imports of U.S. oil, turning to Iran as one of its alternative sources of crude. Related: How Bad Is Iran’s Oil Situation?

As far as India’s imports of Iranian oil are concerned, there have been signs that buyers are preparing back-up plans in case they are unable to import Tehran crude when the sanctions hit.

India will first cater to its own national interest, its oil minister Dharmendra Pradhan said in an interview with BusinessLine published over the weekend.

“We will first look at our national interest. India’s energy basket has multiple sources now. Our focus will be to see that our requirement is not affected, and to ensure this, we will do what we have to do. But, we will also keep a watch on global geo-politics,” Pradhan told BusinessLine.

With geopolitics—tariffs and sanctions—reshuffling the oil interests and oil flows of the U.S., China, India, and Iran, India alone may not be enough to absorb the U.S. oil exports to China, currently America’s second-largest single oil customer after Canada.

By Tsvetana Paraskova for Oilprice.com

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  • Kevin jaegli on July 10 2018 said:
    The tighter the USA squeezes the faster China Russia, Iran and Pakistan build a one belt one road one partner one China system of Russia delivery to China via Pakistan from Iran. American naivete will never understand until they are a jilted boy outside if the panties of China. Fools forget you cannot control the South China Sea with a fake war when pipelines go around fools. Vladimir and xinping are genious. USA fights a war in the last century with a phoney naval blockade.
  • Desmond on July 12 2018 said:
    Oil is zero sum and fungible. Market disruption temporarily changes prices as buyers and sellers realign. USA exports replace Venezuela and Iran in the long term.

    Chinese demand for oil must contract as the Chinese economy relocates to USA. Some German manufacturing must also relocate unless Germany replaces Russian gas with US LPG. If China and Germany are flexible then tariffs need not climb to 50% or more. Yet China first and foremost needs to institute rule of law, independent courts, and democracy. I don't see that happening because the Chinese are as meek as Venezuelans.

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