The renewed U.S.-Chinese trade tit-for-tat threatens to limit U.S. crude oil exports to China that have been gaining pace in recent months and eating into OPEC’s share in the market, a market that is setting the pace of global oil demand growth.
The heightened trade tension between the United States and China over the past week resulted in China threatening to slap a 25-percent import tariff on crude oil and refined oil product imports from the United States.
If this threat turns into reality, U.S. crude oil—which is currently in high demand in Asia due to the wide $9-a-barrel discount to the Brent Crude international benchmark—will become uncompetitive.
A potential tariff would also limit the revenues of U.S. oil exporters and force them to accept even steeper discounts to find new buyers of their oil to replace the sales in their second-largest single oil export market after Canada, analysts warn.
In case of reduced U.S. oil exports to China, the biggest winner of an oil trade war will be OPEC—the supplier that has seen its market share diminished by U.S. oil. The cartel would be the biggest beneficiary of possible Chinese tariffs on U.S. oil imports, as these could help it regain market share, OPEC sources and industry officials tell Reuters.
Yet, they warn that the benefit would be short-lived. In the long run, tariffs and trade wars threaten not only global trade but also economic growth and global oil demand growth.
“In the long term, this will have a negative effect on the global economy even if, in the short term, it might be positive for other non-U.S. producers,” Rainer Seele, chief executive at Austria’s oil company OMV, said in Vienna where OPEC officials and ministers and top oil industry executives attended a seminar this week. Related: U.S.-China Trade War Will Hurt Shale Drillers
Patrick Pouyanne, the CEO of supermajor Total, also voiced his concern that trade wars are “not good news for the world economy.”
While trade wars may hurt global economy, therefore hurting global oil demand in the long run, in the short term, the winner will be OPEC.
“For sure, it is good news for Algerian crude,” an Algerian oil source told Reuters, adding that “new tariffs will support flow from others sources starting from the fourth quarter. It is also a period of robust demand in China.”
“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 earlier this week, 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.
“This shows that China is a significant outlet for U.S. crude exports and the early indications are that the exports would be much higher in Q2 2018 given the lower WTI-Brent differential which made the arbitrage to Asia look more attractive,” Sivanandam noted.
The consultancy forecasts that on a free trade basis, U.S. crude exports to China will increase two-fold by 2023 from the current levels. Related: The Permian Faces Shut Ins Due To Oil Pipeline Shortage
“Hence, the imposition of crude tariffs by China will impact the US-China trade and adds a significant downside risk to our base forecast for the medium term,” Sivanandam said.
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OPEC and Russia will only be too happy to fill in for a possible U.S. import decline on the Chinese market. The two top crude oil suppliers to China are Russia and Saudi Arabia, with Russia beating the Saudis for the top spot in each of the past 13 months.
To be sure, Chinese tariffs on U.S. oil imports are not a certainty, and many analysts think that it’s just the latest scare tactic in the trade spat. The trade war could be “put on hold” again, but in case China slaps tariffs on U.S. oil, almost everyone will lose in the long run. In the short term, there could be one winner—OPEC.
By Tsvetana Paraskova for Oilprice.com
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However, OPEC does not exist in a vacuum. A brewing trade war between the United States and China affects the global economy and impacts adversely on the global demand for oil thus affecting OPEC and other oil producers.
By imposing tariffs on China in the first place and counter-retaliating against Chinese tariffs on American imports in response, President Trump could be intentionally escalating tensions with China and moving towards a real trade war with it.
President Trump seems to be having a spat with everybody who matters in the world from China, to Russia and from Germany to the European Union (EU) under his discredited policy of “America First”.
I have always maintained that the imposition of tariffs on Chinese goods could be the first shots in the petro-yuan/petrodollar war of attrition. If a trade war between China and the United States erupts, China will not run from a fight with the United States and will retaliate by imposing its own sanctions on US exports. China will never bend the knee to President Trump.
A confident China buoyed by the successful launching of its petro-yuan success and an America enraged by the challenge to the petrodollar make a toxic combination for further escalation of tension between the United States and China and a potential full-blown trade war between them.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London