The escalation of the trade war between the US and China is about to bring significant changes in crude ton/mile demand as US crude freights could soon be moving away from China and heading towards India, South Korea, Thailand and Taiwan.
In its latest weekly report, shipbroker Gibson said that “when Donald Trump decided to run for the US Presidency, “America First” was the overriding theme of his campaign. This was reiterated in his inaugural address, when he was sworn into office in January 2017. Within days of entering the Oval office, the president immediately set about introducing his ideas to protect US jobs by implementing trade tariffs. Initially steel was high on the president’s thoughts but at that time he also proposed a “border adjustment tax” (BAT); which, if implemented, would have added 20% to the price of imported crude and products.
Since then, things have gone very quiet until the recent escalation of the trade war with China, which has witnessed heated exchanges between the two nations, resulting in retaliatory measures on a variety of traded goods”.
As trade battle escalates between U.S. and China, U.S. imported crude oil could be upcoming tariff target in China’s crosshairs – a 25% hike via import tariff would make U.S. crude uneconomic to import – Gibson
According to the shipbroker, “as the tariff war escalates, the latest commodity to be implicated in a possible ‘tit for tat’ retaliation, is China’s threat to its purchases of US crude.
The Beijing government has threatened to impose a 25% tariff on US crude oil and oil products after the trade war took a turn for the worse in recent weeks. This would make the purchase of US crude uncompetitive in China, forcing the nation to seek other suppliers.
US government data (EIA) shows crude exports to the country have been in the range of about 330,000 b/d over the 1st quarter of 2018, accounting for about 20% of total crude exports. Results for the 2nd quarter are anticipated to show further gains.
US crude is a good fit for China because of the decline in their domestic production and the quality of the crude which is purchased at a discount to Brent.
China’s independent refiners will look to OPEC to replace tariff-laden U.S. oil
The Chinese independent refiners are expecting tariffs to be imposed on US crude and are likely to look towards OPEC members in the Middle East and West Africa to fill the gap. Earlier in the week Reuters reported some 14 million barrels of US crude oil on the water, with China listed as the destination through August.
Interestingly but not surprisingly, LNG has been excluded from any retaliatory measures. China’s growing demand to substitute LNG for coal led to a very tight market over the winter, with shortages in supply. So, Beijing is being very selective in their tariff countermeasures”.
Gibson said that on the face of it, the loss of US barrels to China could have a serious impact on tonne mile trade from the Atlantic Basin, given also the potential threat to Venezuelan crude supply. As we have highlighted in previous reports, the long-haul trade Caribs/US Gulf to the Far-East have underpinned the VLCC market this year. However, should China follow through with its warning to slap on tariffs, this could place downward pressure on the WTI benchmark, widening the discount to Brent, which in turn would make US oil more attractive to other buyers.
Thailand, Taiwan, South Korea as well as India may be more than happy to tap into available barrels, particularly with the risk of the loss of Iranian crude and the potential failure of Venezuela to meet its supply commitments. In fact, US crude exports to India hit record levels in June.
Europe could also increase their purchases, which might open up further opportunities for crude tanker trade. So, the threat to the tanker market may not be as serious as some have feared. The US will continue to export crude and Chinese refiners will turn their attention to OPEC members to keep the flow going”, the shipbroker concluded.
Meanwhile, in the crude tanker market this week, Gibson said that “another month of recent record VLCC spot volume yet the market has gone down….supply is the ongoing challenge and Owners will be in need of disruption to the flow of that in order to convert the demand into noticeably higher rates. Currently, levels stand at little better than ws 47.5 to the East for modern units with rates to the West back into the high ‘teens’. Suezmaxes drifted sideways, and then a little further downwards on very thin interest. Rare runs to the West were especially hard fought over to drag those numbers towards ws 27.5 with rates to the East at down to ws 65. Aframaxes became a little tighter to allow rates to creep up a touch to 80,000mt by ws 102.5/105 to Singapore but ballasters are on the way and there’s no further steam to come”, said the shipbroker.
